Strangle The Euro

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Includes: ERO
by: Elite E Services

The European crisis is a major market driving factor for the last several months. Instead of guessing the outcome, why not bet on something that is almost a certainty: volatility.

Analysis of situation

There are so many factors involved in the European crisis, including political influences, social influences (such as Spainairds withdrawing 100 billion from Spanish banks), and foreign influences; even a solid analysis of the situation in Europe may not be able to predict an outcome. One thing most would agree, the situation will not end smoothly. That means we can be certain to a large extent of volatility.

Trade the volatility, not the market

Options are a great way to trade volatility in Currency markets, because deep out of the money options can become extremely valuable with market volatility. A type of option strategy called a Strangle (because a trade is placed on both sides of the market) can profit based on volatility, regardless of if the euro recovers or not.

In this case, we will create our strangle buy purchasing 2 deep out of the money EUR/USD options, a put and a call. Expiry date for all strategy variants should be as far out as possible, or about 6 months.

Simple Strangle

Purchase a put and call 250 pips away from the market on each side.

Deep Strangle

Purchase a put and call 550 pips away from the market on each side.

Strangle Ladder

Purchase 5 puts and 5 calls, starting 300 pips away from the current price on each side, and then every 100 pips after that. For example, if EUR/USD is 1.25, purchase 5 puts at 1.22, 1.21, 1.20, 1.19, 1.18; and 5 calls at 1.28, 1.29, 1.30, 1.31, 1.32.

(click to enlarge) (Simple Strangle)Click to enlarge

Other factors

It should not matter if you are able to trade Forex options or options on Forex Futures, as they should track equal. However, buying the direct Forex option may be a less expensive way to enter this trade.

The benefit of this trade, the more volatility the more it will pay off. By having this trade when you see more and more bad news, instead of worrying about how it will affect the rest of your portfolio, know it will make your euro strangle profitable.

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