What Option Traders Can Learn from the EUR/USD

Dear SlingShot Trader Subscriber,

We know it sounds a little strange, but before you sit down to analyze the ups and downs of the stock market this week, we encourage you to take look at the exchange rate between the euro and the U.S. dollar (EUR/USD). You just might gain an insight or two regarding theU.S.stock market.

If you have never traded foreign currencies before, the EUR/USD may be new to you, so here are a few key details:

§ The forex market is the largest financial market in the world – $4 trillion is traded every day – which means governments, central banks and large institutions all pay attention to and have a stake in what happens in that market

§ The EUR/USD is the most widely traded currency pair in the forex market

§ If the euro is getting stronger or the U.S. dollar is getting weaker, the EUR/USD exchange rate moves higher

§ If the euro is getting weaker or the U.S. dollar is getting stronger, the EUR/USD exchange rate moves lower

Now that you’ve got the basics, let’s talk about what we can learn by watching the EUR/USD. To do so, we’ll look individually at each currency in the pair, and then we will look at the performance of the currency pair itself.

What We Can Learn from the Euro (EUR)

The strength of the euro (EUR) is a great indicator for how nervous investors are regarding the health of the Eurozone. You can see that illustrated in the chart below.

 chart1

During September 2011 and November 2011, and continuing through today, investors in the forex market showed growing concerns over the stability of the Eurozone. Specifically, they worried about its ability to deal with the sovereign debt, and financial sector solvency issues it is facing by selling the euro.

On the flip side, during October 2011, EU leaders came together and said they were going to put together a plan to guide the monetary union out of harm’s way. As a result, forex investors piled back into the euro – pushing it higher and higher as they bought the currency.

What We Can Learn from the U.S. Dollar (USD)

The value of the U.S. dollar (USD) also has an important tale to tell, particularly in early 2011. During the first half of 2011,the Federal Reserve carried out its monetary easing policy fondly referred to as QE2. Any time a country’s central bank engages in monetary easing, the value of that country’s currency tends to fall. You can see this illustrated in the chart below.

 chart2

What We Can Learn from the Movement of the EUR/USD

Now let’s take a look at the EUR/USD as a whole.

The EUR/USD is now sitting at 16-month lows. That means it is now lower than where it was before the Fed began QE2. So what does that tell us?

The current value tells us that the concern over potential calamity in the Eurozone has now completely overshadowed the depreciation the U.S. dollar, experienced thanks to QE2. This is not insignificant, especially when you consider that many still believe the Fed is going to intervene in the markets again in 2012. With QE3, the Fed will try to ease monetary policy even further, in an attempt to stimulate theU.S.economy once again.

The Bottom Line for Next Week

Even though theU.S.stock market doesn’t seem to have paid much attention toEuropeso far in 2012, there are plenty of other investors in various financial markets – including the forex market – that are paying attention, and they don’t seem to be too optimistic. This could lead to further pullbacks in the stock market unless we get great news this earnings season.

This Week’s Events

Here are some of the news events that we may trade in the next week or so. We’ll be discussing some of these in tonight’s webinar.

Jan. 12 – Bank of England (BOE) interest rate announcement
Jan. 12 – European Central Bank (ECB) interest rate announcement
Jan. 12 – Weekly Jobless Claims
Jan. 12 – Retail Sales
Jan. 13 – International Trade
Jan. 13 – JPMorgan Chase (JPM) earnings announcement
Jan. 17 – TD Ameritrade (AMTD) earnings announcement
Jan. 18 – Producer Price Index (PPI)
Jan. 18 – Industrial Production

TRADE REVIEW

When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about our SlingShot Trader portfolio, you can read trade alerts here and view our portfolios here. You can also see more trade-specific details by clicking on the trade links below.

Positions Opened

These are the SlingShot Trader positions we opened during the past week of trading that we have not yet closed.

JPMorgan Chase (JPM)On January 9, we recommended you to “buy to open” the Feb 35 Puts for $1.65 or less.

TD Ameritrade (AMTD)On January 10, we recommended you to “buy to open” the Feb 17 Calls for $0.50 or less.

Positions Closed

These are the SlingShot Trader positions we closed during the past week of trading.

SuperValu (SVU)On January 11, we recommended you “sell to close” the Feb 8 Puts. We closed the position for $0.68 for a profit of 23.64%.

Apollo Group (APOL)On January 6, we recommended you “sell to close” the Jan 50 Puts. We closed the position for $0.18 for a loss of 86.67%.

The Mosaic Company (MOS)On January 5, we recommended you “sell to close” the Feb 45 Puts. We closed the position for $0.44 for a loss of 72.15%.

Top Trades Now

These are the current SlingShot Trader positions that we still recommend getting into now, assuming you haven’t already bought a full position.

JPMorgan Chase (JPM) See Positions Opened above.

TD Ameritrade (AMTD) See Positions Opened above.

Webinar Preview: Join Us Tonight at 6 p.m. ET

Every Wednesday at 6 p.m. ET, we host our live webinar, in which we’ll review this weekly newsletter, discuss coming events in more detail and walk through our Top Trades. We also encourage you to submit your questions live during the session. We want to do everything we can to help you become a successful options trader, which is why you’ll have live access to us for an hour every week.

And if you have any questions or comments you would like to send us in advance of the live session — or anytime during the week — you can write to us at johnandwade@slingshot-trader.com.

If you can’t attend the session live, you can watch the archived version on our website in the “Live Weekly” section. It’ll typically be posted within about two hours of the end of the live session.

Sincerely,

 

John Jagerson and Wade Hansen
Editors
SlingShot Trader