Euro bulls have succeeded in cobbling together quite the rebound in the beaten down currency over the past week — spurred on by the recent Federal Open Market Committee (FOMC) announcement the euro is actually enjoying its largest rally since its epic dive commenced last summer.
FXE trades around 1 million shares a day, so it’s plenty liquid. What’s more, it has option contracts listed in $1 increments with tight bid/ask spreads. In other words, traders wishing to bet on the euro’s next move have ample flexibility in structuring their trades.
The ongoing counterattack by the bulls in FXE is cute and all, but I suspect their little revolt will be stamped out in short order. Given both the duration and utter dominance of the bear’s reign in the euro, any and all rallies should be viewed with skepticism.
Contrarians may point out that the euro surge has been accompanied by massive volume suggesting a more substantial shift may be afoot. I would remind such euro optimists of the utter difficulty of spotting the bottom of a trend in real time. It’s altogether more likely that this rally suffers the same fate as all the others in recent memory.
Those willing to bet on more downside in FXE could consider the following trade idea:
Profit From the Euro’s Demise with Options
Since the euro bounce may last a bit longer before succumbing to gravity I like the idea of structuring an options trade with a wide profit range. Sell the May $112/$114 call spread for 23 cents or better.
The reward is limited to the initial 23-cent credit and will be captured provided FXE remains below $112 by May expiration.
The risk is limited to the distance between strikes minus the net credit, or $1.77, and will be lost if FXE sits above $114 at May expiration.
A 23-cent credit may not sound like much, but it comes out to a 13% return on investment — which is actually quite attractive for a high-probability play like this.
At the time of this writing Tyler Craig owned short call spreads on FXE.
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