This is a sample entry from John Payne’s newsletter, This Week in Grain, published on Wednesday August 05, 2015.
A smart guy I know says triple tops never hold. It looks like we have a test case in the US dollar index.
A break in the USD should be very supportive to grain prices in the long term, but in the short term I’m not sure it matters much. Regardless, if you wish to trade the DX, I like buying October calls and puts into the Fed meeting in September.
Buying both calls and puts? Wouldn’t that mean you are playing both sides? Yes, it would. The position is called a LONG STRANGLE, it is basically a volatility purchase. You buy the spread with the idea prices won’t be in this area for very long. You wont care about which way price moves, as long as it moves. See below.
My idea would contain the thesis that the action or inaction the Federal Reserve takes in September will be a jolt to the value of the US dollar and we will get a reset in the valuation of the DX vs other currencies. I believe that if they do not come off the current ZIRP policy on Sep 17th, we will see the dollar fall dramatically. The trade may begin to believe the Fed will not go through with actions as they indicate going forward and feel there is more work to do in repairing the economy. This is where the puts would ideally kick in and make us some money.
If the fed does go through with the rate cut as many are believing and trading like they will (hence current DX rally), I think we see the DX pop through the recent highs and possibly test the 102 level very quickly. There are those in the trade who I read that believe the DX will make a run at 2002 levels as the fed inches their way off 0.
So what do we do, try to guess what the Fed will do? Ill pass on that, Id rather make my bet on whether or not the Fed’s action will cause volatility. That’s what this trade does.
I would play it in the December options so you can get a few meetings of exposure. If we would see them declare intentions and the market would move, we can always come out of the option that has lost money to recoup some of the damage while the long option we hold is being encroached on by the market price and making money.
Trade Rec: Buy 1 DXZ 940 put for 40 points and Buy 1 DXZ 102 Call for 87 points. Total cost will be 127 points or 1270 dollars before fees. We would risk to 0, but keep in mind we will be actively managing the trade if it calls for it. See the option source graph below.
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