Options for stock investors. A better way to trade.

New Trade Alert July 19th – FXE EuroCurrency ETF

New Trade Alert for (FXE EuroCurrency ETF)

Eurocurrency  –  Buy January 103 Call @ 6.00 or less

 


Risk Rating: 2.5     (1 = lowest   5 = highest)

 

Below Break Even Probability: 56%

 

Max Loss Probability: 14%

 

Stop Loss @ 50% of premium paid


 

 

Brexit but NOT Broken

 

The tape tells the truth with the overreaction onslaught erased in short order after the British blunder.  A couple of days of nervous selling shook stocks around the world before bargain hunters brought it back…and more new highs in the London FTSE and U.S. markets.

 

Sometimes it is equally important what a market DOESN’T DO with the Eurocurrency an example as it held strong with crisis lows at $107 in the FXE exchange traded fund.

 

 

THE DECADE LOW AT $103 FROM DECEMBER WAS NEVER EVER IN SIGHT.

 

FXE price action in the last year has tracked mostly from $104 to $112 with the over under pivot to watch at $108.   The first upside objective is the $112 resistance top.

 

 

The Brexit bashing was also another example of higher lows and lower volatility than the last currency crisis.

 

The January option has over 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 $107.50, for example, an In The Money $103 strike option currently has $4.50 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 $103 Call at $6.00 or less. A close in the below $105 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 75% for the $103 strike price.

 

January has over six months for development.
 
The maximum loss is limited to the $600 or less paid per option contract with a stop loss exit at half to lessen exposure.  The upside, on the other hand, is unlimited.

 

The FXE option trade break even is $109 at expiration ($103.00 strike plus $6.00 or less option premium). That is about a dollar and a half above FXE’s current price.

 

Essentially, you are long from $103, below the lowest level in the last decade, with over six months of time for ANY bullish development with absolutely limited risk to the $600 paid for the option.

 

A modest move to the $112 top of the recent range would see the option more gain 50%.

 

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