New Trade Alert for (FXE Euro Currency ETF)
Euro Currency – Buy FXE January 109 Call @ 5.25 or less
Risk Rating: 2.0 (1 = lowest 5 = highest)
Below Break Even Probability: 61%
Max Loss Probability: 14%
Dollar Index Weekly Key Reversal set up for decline…
The Dollar short covering drive in 2018 after a straight down 2017 has stalled for now. A new one year high reversed course to close lower on the week putting a Dollar top in place.
Euro currency, moves inversely, has bottomed out as well setting up for a short squeeze on renewed strength. The $110 level has been a support level to lean on to buy in the last few years.
An FXE wedge pattern between $110 and $114 has seen lower highs and higher lows edging to the upside.
A breakout of the $114 top targets $118 which was May support fail.
The January option has six months for development.
A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.
An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.
The Options Way: Unlimited Upside Potential with Limited Risk.
A FXE long call option can provide the staying power in a potential 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 gain or 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 stock trade has a fifty/fifty chance of success. Buying options ITM options increase 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 FXE trading at $112.25, for example, an In The Money $109 strike option currently has $3.25 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.
Trade Setup: I recommend the January FXE $109 Call at $5.25 or less. A weekly close in the below $110 on a weekly basis or the loss of half of the option premium could 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 a much less money tied up in the investment. The Delta is 76% for the $109 strike price.
January has six months for development.
The maximum loss is limited to the $525 or less paid per option contract. The upside, on the other hand, is unlimited.
The FXE option trade break even is $114.25 at expiration ($109.00 strike plus $5.25 or less option premium).
Essentially, you are long from $109, below the one year lows, with over six months of time for ANY bullish development with absolutely limited risk to the $525 paid for the option.
A modest move to the $114 wedge top targets a measured move to $118 that would see the option more gain nearly 100%.