Investing With Options header image ≡ Menu

Just Released: Get Your FREE Iron Condor Trading Toolkit


Click Here to Download

How to Hedge Against the Euro News

Will it Hold?

The "risk on" trade is sprinting higher this morning as news is out that a European debt deal has been settled. This has led to strength in the euro as a sigh of relief comes through in the markets, at least for now.

But let's say that you are a little skeptical about the news, and that as we are coming into previous support, we may end up finding sellers stepping in as full details are released.

That kind of opinion is fine, but if you simply just leverage up short, you may find yourself in a very deep hole.

Options trading can help you limit your overall risk while trading directionally. One of my favorite plays in an over extended market is trading calendar spreads that are out of the money.

Consider this trade idea:

Do note, because $FXE options trade only during the day, the price of this spread may change on the open.

Here are the analytics, courtesy of thinkorswim:

What does this trade give you?

  • small initial delta so if you're wrong it won't be that bad
  • positive vega so if $EVZ spikes you will be profitable
  • the opportunity for positive time decay if the euro does pull back
The tradeoff for these advantages is that you are introduced to extreme downside risk-- if you think that the Euro is going to dissolve in the next 2 months, then put buys are for you. But for the option trader with risk management on her mind, this is a trade to consider.

Learn More About Calendars

Trading calendars requires a little more understanding of the options market, because different months have different risks and pricings.
OptionFu is my options training course that has an entire section dedicated to trading and adjusting calendar spreads, along with over 25 hours of video you can access instantly. Learn more here.

 

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/