How To Play The Euro With Options

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 |  Includes: FXE
by: Sammy Pollack

The best way to play the Euro might be through a straddle. The reason for this is that a major move either higher or lower is likely for the Euro. The direction of the move will most likely be based on what happens at this week's EU summit.

If leaders agree on a comprehensive plan that includes a long run goal of Eurobonds and fiscal unity, the Euro is likely to soar. In imposing austerity, Europe will ensure that the Euro is a very strong currency. The "austerity" solution in Europe would be very bullish for the Euro, but possibly bad in the short run for the European economy as discussed here.

Another possible outcome of the meeting is a failure to agree on any real solutions. This would likely result in a continued run on Euro denominated assets into assets denominated in other currencies. If this happens, the Euro is likely headed for a slow painful death.

In either case, a straddle should present traders with solid gains.

Strategy:

Buying January $134 call and put options on the Currency Shares Euro Trust (NYSEARCA:FXE) currently trading at $133.55.

Calls are currently trading at $2.64

Puts are currently trading at $3.25

This bring the total cost to $5.89

For the trade to make money, the FXE must move either up or down $5.89 by the time of expiration.

This is a likely scenario, because either the Euro will collapse by January, or the Euro will be saved and rally big. In either event, investors who buy straddles will make money. While paying $5.89 for an option strategy seems expensive, it actually is not. Even if FXE does not move the full $5.89, investors will not lose all of their money. For example, if FXE rallies only $5, straddle holders will only lose $0.89, far from the full $5.89. If one were to simply buy calls or puts on FXE, then they would risk losing all of their investment.

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