The Decades-Low Currency Trade For Triple-Digit Profits

| January 20, 2017 | 0 Comments

optionsAn Oil and Commodities crush killed the Loonie with the Canadian Dollar currency down nearly 25% in five years.

DOLLAR POWER priced in rising rates in the United States on only optimistic outlook.

The FXC Canadian Dollar exchange-traded fund dropped from $100 to a decade-low at just under $70 in the last four years. The push to the $75 level positions the fund for an attack on the old $80 sideways support that was seen in 2015.

The Crude recovery along with the 2016 CRB climb of 8% supports strength in Canada.

option trade

The FXC halfway technical target stands up above at $85.

A June option has over five months for development.

Buying actual shares is expensive and ties up funds for the long-term in a stock play when they could be put to better use. An In-The-Money Call option gives you the right to be long the ETF/stock from a lower strike price and costs much less than the stock itself.

The Options Way: Unlimited Upside Potential with Limited Risk. 

An FXC long call option can provide the staying power in a potentially larger trend extension. More importantly, the maximum risk is the premium paid.

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for a gain or a loss.

There are two rules options traders need to follow to be successful.

Rule One: Choose an option with 70%-plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is also important to buy options that payoff from only a modest price move.

There is no need to ONLY make money on the all but infrequent long shot price explosions.

Good Options can profit from only modest directional moves.

Any trade has a fifty/fifty chance of success. Buying ITM options increases that probability. That Delta also approximates the odds that the option will be In The Money at expiration.

Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.

With FXC trading at $74.70, for example, an In The Money $70 strike option currently has $4.70 in real or intrinsic value. The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need — at least three to six months for the trade to develop. Time is an investor’s greatest asset when you have completely limited the exposure risks.

Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.

option trade

Trade Setup: I recommend the June FXC $70 Call at $5.50 or less. A close below $72 on a weekly basis or the loss of half of the option premium would trigger an exit.

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

The option also behaves much like the underlying stock with much less money tied up in the investment. The Delta is 90% for the $70 strike price.

June has over five months for bullish development.

The maximum loss is limited to the $550 or less paid per option contract with a money management stop at half of the premium paid. Upside, on the other hand, is unlimited.

The FXC option trade break even is $75.50 at expiration ($70 strike plus $5.50 or less option premium). That is about 75 cents above FXC’s current price.

A recovery back into the $80 level would nearly double the option value. A larger objective targets the midpoint of the last five years at $85+ in FXC.

Essentially, you are long from $70, decade lows were just under $68, with over five months of time.


Note: Alan’s colleague, Tim Plaehn, is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter and 30 Day Dividends.

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Category: Options Trading Strategy

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Alan Knuckman is a contributor to