Explore Your Options in the Dollar
The U.S. dollar has been gaining a bit of ground this past month after a prolonged bear market trend. But is this really a trend change? You can use options to trade your view, and I think there are some strategies with good risk-reward right now you can pursue in the U.S. Dollar Index.
The Federal Reserve meeting on April 30 spurred speculation the Fed would be done lowering interest rates, or at least take a pause, and turn to inflation fighting. That spurred a rally in the dollar, along with ideas the worst may be behind for the U.S. economy. April U.S. retail sales, released earlier this week, were a bit better than expected, spurring hope for the dollar. The CBOT Fed funds futures market reflects a 94 percent chance the central bank will keep its benchmark rate at 2 percent at its meeting on June 25, but is starting to price in a rate increase before year-end.
Meanwhile, concern about the state of the European economy is growing, and the way the London interbank offered rate (Libor) is calculated is under review amid growing questions about Libor's accuracy. The libor, the London interbank lending rate, is a key benchmark for corporate loans.
However, the picture isn’t so clear just yet about the dollar or the euro. This morning, a New York Fed regional manufacturing survey showed weakness in April, and weekly claims for unemployment insurance have inched higher. And, ECB officials have reiterated rate cuts don’t seem to be in the cards for the Eurozone.
There’s a lot of mixed emotion on the U.S. dollar at this point. Some market participants think it has hit bottom, some think it’s just facing a correction within the still-bearish trend that’s been several years in the running. There are a lot of issues causing investors to turn bullish the dollar, and if you are one of them, I recommend looking at options.
The September Dollar Index futures, traded at ICE Futures, are trading near 73.875 this morning. The calls expire September 5, so you have some time on your side if you purchase an at-the-money 74 call, which is priced about $1,400, not including your commission cost. That’s not too bad given the time and where the market is at. You can also consider the 74/76 call spread for just under $700 not including commissions, which offers you a potential $2,000 profit if the market goes your way. I think that 3-to-1 risk-reward ratio is pretty good to consider.
If you think the dollar may settle back a bit, you could also buy a 73 put, at a cost of about $1,000 not including commissions, and then wait for a pullback to 73.40 on the futures. At that point, you could buy a futures contract for a long position with unlimited potential on the upside, but with a hedge using the put.
If you are bearish, the puts are a bargain right now. The 73 put is priced at about $1,000 not including commissions, and put spreads are even cheaper; the 73/71 put spread is priced about $500 bucks. If you think the dollar is headed back down, this may be the way to go.
Of course there are other strategies you can consider, give me a call and I’d be happy to tailor a strategy to your specific goals and risk-tolerance. Ask about our special 50 percent off commission offer for new clients too.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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