Follow The Smart Money Betting Big On This Scenario

| March 1, 2017 | 0 Comments

FXEA $2.35 million dollar bet that this stock will move 5% higher in the next three months could only come from a big-money trader seeing something the rest of the market is not. See how to follow along on this trade that could end up paying off quite nicely. 

Have you ever wondered why so many investors are fixated on what other people are doing? I’m not referring to what the crowd is doing (although that’s also heavily watched), but what “famous” investors are doing. I mean, there’s a whole industry out there which tracks what the investment gurus are trading.

Gurus certainly have an impressive track record, otherwise they wouldn’t be so closely followed. But, they also have massive resources available to them – not just money but information, contacts, technology, etc. There is an excellent chance that gurus are making more well-informed investment decisions than we are.

So, when a huge trade hits the wire (one which could only be made by someone with a boat-load of capital), it makes sense to pay attention to it. This is especially true for the options markets, a venue where institutional trades are often made.

For instance, check out this recent eye-opening trade in CurrenyShares Euro ETF (NYSE: FXE):

With the ETF trading around $102, someone (with lots of money) purchased roughly 23,500 June 107 calls for $0.75. Average daily volume in FXE options is 14,000 contracts, to put into perspective how big of a trade this is in this ETF.

So why is this trade such a big deal?

First off, FXE is the most popular ETF for trading the Euro versus the US dollar. For investors who want to take a bullish position on the Euro, FXE is probably the most straightforward and accessible way to do so.

In this case, a trader is betting the Euro is going to return to levels not seen since before the US election. As you can see from the chart below, FXE is sitting near 52-week lows. The 107 strike purchased by the FXE trader is right around the 200-day moving average.

CurrenyShares Euro ETF

In order to make money on this trade, FXE would need to be higher than $107.75 (strike price plus the premium paid) by June expiration. That’s about a 5% move higher in the next 3 to 4 months – a fairly significant move for a major currency.

Here’s the good stuff…

This trade cost $2.35 million in premiums to initiate, so someone is clearly very serious about this position. That’s also how much the trader stands to lose on this trade if it doesn’t work. On the other hand, let’s say FXE returns to the middle of the range it was trading in prior to the election. If the share price goes to $109, the trade earns $1.25 in profits ($109 – $107.75 breakeven point). That’s a hefty profit of almost $3 million.

Just as a fun exercise, let’s say FXE hits the 52-week high of right around $113 before expiration. That’s a cool $12.3 million in profits! Of course, that’s a highly unlikely scenario but just gives you an idea of the upside potential of this trade. Even returning to $109 would generate over 100% returns.

In general, what makes this scenario interesting is just how many investors are long the US dollar right now. It’s possibly the most widely held institutional position at the moment. With interest rates set to increase multiple times this year, the dollar is only expected to attract more investors. (Investors will earn more interest on dollar-denominated fixed income assets as interest rates go higher.)

In other words, it’s hard to imagine a scenario where the USD takes much of a sustained beating. That means the FXE trader must believe the Euro is going to increase substantially relative to the dollar. The implication here is the Euro region is ready to break out of the doldrums it’s been in since the financial meltdown.

That’s obviously a significant change in the macroeconomic environment. However, it’s one which certainly seems plausible as global economic indicators improve. There also could be a flood of money pouring into Europe if the US political environment continues to be highly volatile.

If you believe this trader is correct, then what should you do? Certainly you can invest in European stock or indexes. However, there’s no reason you can’t emulate this trade yourself. FXE hasn’t moved much since the trade, so you could still buy those 107 calls for around the same price. Or, you could go higher or lower with your strike. Either way, this is the sort of big trade which is highly accessible to the individual trader, and could end up paying off quite nicely.


Note: Jay’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.

Tags: , , ,

Category: Insider Buying/Selling

About the Author ()

Jay Soloff is an options analyst with Investors Alley.