Sell Short the Currency Shares Japanese Yen Trust June, 2012 (FXY) $125-$129 call spread at $0.42 or best
- Opening Trade
- expiration date: June 15, 2012
- Portfolio weighting: 10% = 30 contracts
This is a bet that the Currency Shares Japanese Yen Trust June, 2012 (FXY) trades at or below $125.42 on the June 15 expiration in three weeks. The Bank of Japan passed on the latest opportunity to expand quantitative easing at it latest meeting. The market response was to temporarily take the heat out of the short play on the yen, boosting the (FXY) from $122 to $124.50. I don’t think that anyone wants to chase the yen up from here. It is much more likely that it stagnates, especially now that we are getting a modest bid to “RISK ON” assets.
Just to be clear here, being long the yen is a “RISK OFF” trade, and being short is a “RISK ON” trade. So selling short a call spread is a modest “RISK OFF” trade. I know this can be confusing using this double reverse kind of logic. Sometimes even I get befuddled, even after doing this for 40 years, especially when I am in a hurry.
The trade has the additional benefit in that it offsets the time decay in our existing long position in the Currency Shares Japanese Yen Trust September, 2012 (FXY) $121 puts. Time decay is hurting us on this one and I intend to bail the next spike down in the (FXY) and up in the puts.
If this spread expires anywhere under $125, as I hope, your total profit should amount to (30 X 100 X $0.42) = $1,260. That gives you a profit on this less than three week play of 1.26% for the notional $100,000 model portfolio. Professional options traders do this sort of trade all day long. This is the same as taking out a full ¥1.10 out of the cash market on a non-leveraged basis.
To lose money on this trade, the cash yen market would have to rise above ¥78.30, an unlikely event in the current stagnating yen foreign exchange market. A major stock market crash might get you there, but I think that is unlikely over the next few weeks. Even then, your risk is capped at $129, giving you a maximum potential loss of $3.57. The $129 leg has the additional benefit in that it reduces you margin requirement substantially.
Don’t place a market order for this trade or the floor traders will rip your eyes out. Don’t place individual orders for the legs either. Instead, place a limit day order in the middle market for the call spread only around $0.45, and wait for the market to come to you. It will find you.
The market can be illiquid for the deep out of the money $129 calls. If nothing happens then start raising your bid in 5 cent increments until something happens. You might also consider selling short the $125-$128 call spread instead for less money and less risk with more liquidity.
There’s no rush to do this, but if you get filled today you can capture the extra sweetener of the time decay over the three day Memorial Day weekend. If you can’t get done at a price that you are happy with, then walk away and wait for the next trade alert. The same is true if I have failed to adequately explain this trade and you don’t understand it.
These are the trades you should execute:
Sell short the June, 2012 (FXY) $125 – calls at $0.45
Buy the June, 2012 (FXY) $1129 calls at $0.03
Net Premium Proceeds: $0.42