The DeCarley Perspective Trading Newsletter
Selling Option Strangles in the Euro Currency
This text was sent to DeCarley brokerage clients on May 20th 2015.
There is substantial risk of loss in trading futures and options. Past performance is not indicative of future results.
On the commodity radar:
* Implied volatility in Euro options is elevated, and recent swings in the currency has helped to pump up option prices. Let's sell a strangle using the July options.
Sell July Euro Currency 116.50 calls and 105.50 puts
Intense volatility in the Euro has created an environment in which it is possible to sell strangles with distant strike prices at attractive pricing. For instance, It is possible to collect nearly $1,000 for a strangle with a 10 handle spread expiring 44 days from now. Last year it would have required a 4 to 5 handle spread to collect similar premium.
Following the recent thrashing, we suspect the Euro will have a tendency to consolidate. Further, seasonals suggest stabilizing trade going into early June. Accordingly, we like the idea of selling the July 116.50 call and the 105.50 put for a total of about 70 ticks, or $875. This creates a scenario in which the trade makes money or breaks even anywhere from 117.20 down to 104.80 if held to expiration. Ideally, we'd like to see prices stay within the strike prices; if so it would be possible to yield the max profit of $875 before transaction costs (assuming the trade was held to expiration). This gives the Euro nearly 500 ticks to move in either direction, and, in our opinion, offers attractive odds of success.
Should the Euro travel above 116.50, or below 105.50, the risk is theoretically unlimited and is similar to being short or long the futures contract.
**Past performance is not indicative of future results (seasonal data tells us what has happened in the past, not necessarily what will happen in the future).