The Trade Arena: The Currency Shares Euro Trust ETF (NYSE: FXE)

Options
by 

Investors can't agree on everything. If they did, trading wouldn't exist.

I mean, come on, your opinion is just as important as any so-called "talking head". That difference of opinion is exactly why I created The Trade Arena. It will allow us to think about both sides of a trade. Every week I will construct a trade (or two) for a specific stock or ETF. I'm going to track the performance of these trades and go into great detail about what's working, what's not working and why.

If you follow along in The Trade Arena, you'll quickly learn about the various ways to apply options strategies to my assumptions on a highly liquid stock or ETF. More importantly, those who are new options traders and experts alike can use the trades.

So this week, I want to short the Euro. Most of us know about the ongoing saga in Europe. For now, the debt crisis has been alleviated, but for how long? As it stands, FXE, the tracking ETF for the euro, sits in a very precarious short-term, "very overbought" state. The RSI (5), a momentum indicator that measures the speed and change of price movements, is reading 84 and the underlying ETF is back at what seems to be a point of very strong overhead resistance.

My thought is that we will see a short-term decline over the next few weeks. I have conjured up a few trades for those of you who are bullish and for those of you who are bearish. Over the next few weeks we will follow the progress and make any necessary adjustments to the trade.


As I said, I'm personally bearish on the Euro. But I welcome dissent. If you're bullish, I'd love to hear why, and I'd also love to hear about how you're playing the trend. Send me an email at [email protected].

If you're not sure how to play it one way or another, consider paper trading the following ideas. I know you'll learn something.
 

FXE Currency Shares Euro Trust

If you're Bearish you could do the following trade:

Simultaneously:

Sell the Nov. 139 calls &
Buy the Nov. 140 calls for a credit of $0.31
Return on Capital: 44.9%
Strategy: Short call vertical (bear call spread)
Max Loss: $69 per contract
Max Profit: $31 per contract
Probability of Profit: 64%
Expiration: 16 days

Basically, if FXE closes below the short strike of 139 by November expiration (16 days) you will reap the entire of credit ($31 per contract).

If you're Bullish you could do the following trade:

Simultaneously:
Sell the Nov. 136 puts &
Buy the Nov. 135 puts for a credit of $0.30
Return on Capital: 42.8%
Strategy: Short put vertical (bull put spread)
Max Loss: $70 per contract
Max Profit: $30 per contract
Probability of Profit: 61%
Expiration: 16 days

Basically, if FXE closes above the short strike of 136 by November expiration (16 days) you will reap the entire of credit ($30 per contract).

Again, we will follow the trade over the course of the next few weeks and once the trades are complete (either before or at expiration) we will add another bullish/bearish or neutral based trade.

Andy Crowder
Editor & Chief Options Strategist, Options Advantage
Richmond, Vermont
 

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