The Pound In The Balance
Jay Kaeppel | Aug 19, 2015 12:19PM ET
OK, I know that the British pound is not a market that most people follow. Still, at times it pays to remember:
Jay’s Trading Maxim #312: Opportunity is where you find it, not necessarily where you want it to be.
I wrote about this and since that time the pound (I'm using ETF Guggenheim CurrencyShares British pound Sterling (NYSE:FXB) instead of British pound futures simply based on the guess that 99% of the people who read this have never and will never trade pound futures) has mostly traded sideways. In the last several sessions the Pound has tried to breakout to the upside but has been unable to.
(Also, the Sept. 153 put that I highlighted at $1.80 is presently trading at $1.05 – illustrating the negative effects of time decay. Still, that trade can make money quickly if FXB sells off prior to September expiration)
Figure 1 – FXB at a critical juncture
The Elliott Wave count as shown in Figure 2 is still pointing to the possibility of a meaningful price decline. So for those who are willing to accept the “mental risk” (meaning that there is a good chance you might end up kicking yourself and saying “why did I do something so stupid and impulsive?”) a short-term bearish trade with a stop above recent highs could offer a very high profit-to-risk ratio (again with the caveat that the probability of profit may be low since a tight stop will be used).
Figure 2 – Bearish Elliott Wave projections for Daily (top) and Weekly (bottom) FXB charts
Playing with Options
What follows is not a recommendation but rather an example of a simple “way to play.” IMPORTANT NOTE: The option used in the following example has an Open Interest of exactly 0. It also has a wide bid/ask spread so anyone tempted to “take the plunge” should make note slippage is inevitable if a quick exit is called for. Also, nothing less than a meaningful decline in FXB will allow this option to generate a profit. That being said:
Get The News You Want
This trade involves buying the at-the-money December 154 put. The bid is $3.00 and the ask is $3.30. To assume a worst case scenario we will assume the position is entered with a market order at $3.30 (a real life trade might be wise to put in a limit order to buy at $3.15 or $3.20).
As you can see, one of two things will happen, either:
*FXB will fall and this trade will generate a substantial profit (percentage wise).
*FXB will not fall, in which case the trade will lose a maximum of $330.
A couple of notes:
*If FXB takes out the recent high of $156.04 a trader can consider getting out at that point.
*If FXB falls to its recent low the trade can make roughly $200.
*If FXB falls to the upper Elliott Wave projected range of 139.77 this trade can make over $1,000
Summary
This type of (“example” not “recommendation”) trade is “for speculators only.” The primary reason is that it holds the potential to make a person feel very stupid very quickly. All FXB has to do is rise a little bit to the upside and the whole basis for the trade (resistance near 154 and a bearish EW projection) collapses.
Still, opportunity is where you find it.
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