Monday, September 14, 2009

Currencies: How to Profit From the USD Going Up or Down

The USD has dropped significantly in recent weeks and months. It has fallen so much that it threatens other countries, whose currencies have risen too much. The current move is unsustainable, it's too much, too fast. While in the long term the USD will likely continue falling, for now chances are that a reversal is in the cards, particularly with the G20 meeting coming up and so many countries unhappy with the sudden valuation of their currencies.

So can does an investor profit in such scenario?

A possibility is through straddles on UUP, the PowerShares DB US Dollar Index Bullish Fund. The Master Fund invests in futures contracts (the DX Contracts) with a view to tracking the changes, whether positive or negative, in the level of the Deutsche Bank US Dollar Index (USDX) Futures Index – Excess Return (Long Index), the Long Index or the Index, over time.

Here is a technical chart of UUP. Since April is has moved from $26 to $22.81 (a drop of approximately 13%).

(please click to enlarge)

The tables belows shows straddles on UUP. UUP is trading conveniently close to $23. Since currencies do not move as much as stock prices, we use straddles as opposed to our usually preferred strangles, but either is possible.

So for September, a move of 1.3% will make the straddles profitable. However, there are only 5 days left until options expiration in the month. That is very risky.

For October, the move required is 3.1%, and for December it is 5.1%. These are quite possible.

Since we expect the USD to move up (temporarily), then move back down, it is also possible to use a similar techique that we use with UNG, where we sell the straddle leg that moves up, then the leg that was worthless becomes valuable again.

For investors in Canada, it is also possible to use a similar strategy withing RRSPs even those usually do not accept puts. We will discuss this in another post.

Please note: For (free) timely trend technical analysis and alerts on UUP and UDN (powered by INO), please visit Technical Trend Analysis Tool

As always, please do your own due dilligence.

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