Buying A Call Option on FXCM (FXCM).

| January 23, 2015 | 0 Comments

optionsBuying A Call Option On FXCM (FXCM)

The biggest financial event of the last several days occurred due the extraordinary measures taken by the Swiss National Bank. The SNB shocked the world by deciding to remove the Swiss Franc off of its peg (to 1.20 Euros), a level it had maintained for the past three years.

To sum it up, pretty much no one saw this coming.

Banks, hedge funds, currency traders, and several other financial players were totally blindsided by this move. Many currency market participants took one squarely on the chin – with millions of dollars lost as the Swiss Franc soared over 30% versus the Euro in a single day.

One company which got absolutely hammered by the SNB’s unexpected move was FXCM (FXCM). In a nutshell, FXCM provides online foreign exchange trading and services to retail and institutional customers.

When the Swiss Franc lost its peg, it cost FXCM a fortune. Basically, the company’s market makers abandoned ship the day the announcement was made. And, it left the company unable to close losing client positions. In order to cover the losses, FXCM was forced to take a $300 million loan from Leucadia (LUK).

The loan effectively kept the company solvent, however, the terms of the loan are awful. It’s a 10% interest two-year loan which increases at 1.5% per annum each quarter the loan isn’t paid back (with a cap of 17%). In other words, taking this loan was like getting hit in the head by a 2 by 4.

FXCM shares plunged on the news, down 86% in a day. However, the shares have recovered a bit on news the company is raising its margin requirements for traders.

The current stock price is $3.41. That’s 168% from the low of $1.28, but still 81% from the 52-week high of $17.68.

So is now the time to buy a call option on FXCM?

As a reminder, a call option makes money when the underlying stock goes up. But FXCM nearly went bankrupt. So is it worth it?

For a more in-depth look at FXCM, you can check here.

Here’s the deal…

By raising margin requirements, FXCM should avoid situations like the Swiss Franc debacle in the future. Higher margins will increase the amount of collateral held by the company.

Since the company has been able to avoid bankruptcy, it shouldn’t have any major solvency issues moving forward. Furthermore, the volatility in the currency markets in the year ahead could really help the business increase revenues.

What I’m saying is that if FXCM was going to fail, it would’ve happened already. They secured a loan to ensure solvency (albeit an expensive one). And, they raised margin requirements to protect their future.

As such, the company should recover. So, with recovery a near certainty, the stock should likely be trading at a much higher price.

Let’s take a look at a chart of FXCM:

call option buying opportunity, a chart of FXCM

As you can see from the chart, FXCM got crushed, and has just started to recover. But, it doesn’t have to return to prior levels in order to make money on a call trade.

Now could be a great time to invest in a FXCM call option.

Because the stock is so cheap, FXCM calls are also priced quite reasonably. In fact, you can purchase a May 2.50 calls for just $1.30.

At $1.30, the call starts making money at $3.80 or higher before May expiration. That’s only $0.40 higher than it is now. At such a reasonable price, I believe the May calls will easily pay off by expiration.

Yours in Profit,

Gordon Lewis
Options Trading Research

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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