FXE Analysis

Update 7/5/2016: I have exited FXE for a profit. After the vote for the United Kingdom to leave the European Union, FXE -- tracking the Euro -- fell sharply to just below the lower boundary of the position, and then recovered to within the profit zone.

Shares fell by 0.9% over 14 days, or a -24% annual rate. The options position produced an 18.7% yield on debit for a +2,770% annual rate.

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Updated 6/21/2016 with a second attempt to get a fill.

The Guggenheim CurrencyShares Euro Trust (FXE), an exchange traded fund, tracks the price of the Euro currency. I'm looking at it as a possible play on Thursday's vote on whether the United Kingdom should exit the European Union.

[Economy of the European Union in Wikipedia]

FXE

FXE has AUG series option, my preference at this point, but they have no liquidity so I shall use the JUL series of options, which trades for the last time 25 days hence, on July 25.

Ranges

Implied volatility stands at 12%, which is 7/10ths of the VIX, a measure of volatility of the S&P 500 index. FXE’s volatility stands in the 65th percentile of its most recent range, The price used for analysis was $109.70.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	113.18	116.66	N/A
Lower	106.22	102.74	N/A
Gain/loss	±$3.48	±$6.96

Implied volatility 1 and 2 standard deviations; central tendency earns move

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

The Trade

Polling and bookmaking on Brexit has been quite volatility. I shall cautiously go for a direction-neutral strategy.

Iron condor, short the $112 calls and long the $113 calls,
short the $107 puts and long the $106 puts,
sold for a credit and expiring July 16.
Probability of expiring out-of-the-money

JUL	Strike	OTM
Upper	112	77.0%
Lower	107	75.3%

The premium is $0.33, which is 36% of the width of the position’s wings. The stock at the time of entry was priced at $109.75

The risk/reward ratio is 2:1.

The zone of profit in the proposed trade covers a $2.50 move either way.

Decision for My Account

I have opened a position on FXE as described above.

-- Tim Bovee, Portland, Oregon, June 21, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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Based on a work at www.timbovee.com.