3 Prudent Ways to Profit From a Declining Dollar

by: Simon Monger

The U.S. dollar has fallen significantly in recent months, following concerns about U.S. deficits and a perceived lack of support for a stronger dollar from the Federal Reserve. While the move may be good for companies exporting goods, everyday consumers are facing higher costs for things like food and fuel. In this article, we’ll look at three prudent ways to profit from the declining dollar.

Place a Tempered Bet on Commodities

One of the most popular ways to profit from the dollar’s decline has been commodities, ranging from crude oil to gold and silver. Since commodities are priced in dollars, a lower value for the dollar equates to a proportionally higher value for the commodity. However, investors should be careful given that commodities have risen far higher than the dollar index’s mere 6% decline over the past year or so.

By purchasing one call option at-the-money and selling another at a target price out-of-the-money, a bull call spread enables investors to profit from the difference between the strike prices and limit their loss to the net debit. This strategy can be employed on broad commodity ETFs like iPath Dow Jones UBS Commodity Index (NYSEARCA:DJP) or niche ETFs like iShares Silver Trust (NYSEARCA:SLV) or ProShares Ultra Gold (NYSEARCA:UGL).

Leverage Up a Bet on the Treasury’s TIPS

Treasury Inflation Protected Securities, or TIPS, are Treasury bonds that are adjusted to account for inflation as measured by a basket of consumer goods. While commodities may see larger moves to the upside, Treasury bonds offer greater security with the U.S.’s AAA rating. However, investors may be somewhat concerned about credit risk and a lack of meaningful volatility.

By purchasing long-term call options and writing short-term put options against the position, a diagonal spread strategy is a useful way to take a leveraged position and reduce risk over time, while limiting their downside to the cost of the option. This strategy can be employed on the iShares Barclays TIPS Bond ETF (NYSEARCA:TIP), PIMCO Broad US TIPS Index Fund (NYSEARCA:TIPZ) or SPDR Barclays Capital TIPS ETF (NYSEARCA:IPE).

Place a Moderate Bet Against U.S. Treasuries

Many of those in the markets feel that TIPS do not effectively hedge against inflation (due to the calculation used in the Fed’s formula), so those investors may want to consider a more active play on inflation and short U.S. Treasuries. Unfortunately, this is already a very popular trade and investors should be careful when jumping on the bandwagon.

By purchasing an at-the-money put option and selling another out-of-the-money put option at a target downside price, a bear put spread offers investors a moderately bearish way to speculate against U.S. Treasuries. The maximum gain is limited to the difference between strike prices, while the maximum loss is limited to the net debit paid. This strategy can be employed on the iShares Barclays 20+ Yr. T-Bond ETF (NYSEARCA:TLT), iShares Lehman 7-10 Yr T-Bond ETF (NYSEARCA:IEF) or similar Treasury ETFs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.