Recent talks of tariffs and trade wars have the relationships with the US Dollar moving around again. Canada is one of the United States biggest trading partners, and the number one spot for U.S. agricultural exports. Anytime we have seen a hint of that relationship interrupted, the Canadian Dollar tends to weaken against the U.S. Dollar.
On top of the concerns over NAFTA, and any potential tariffs on imports in the United States, the forecast for the USD is starting to kick in a bit. With interest rates forecast to move up in the next 9-12 months on Federal Reserve action, the USD should strengthen over that time, especially if the economy continues to improve.
I’m looking to take advantage of a move lower in the Canadian Dollar using an options spread. I’m taking this route over a futures position because I want to define risk. Combing a long vertical put spread with a short vertical put spread allows us to define risk, and bring down the cost of entry.
Bearish Loonie Trade
Buy the June Canadian Dollar 7550 -7400 Put Spread
Sell the June Canadian Dollar 7400-7300 Put Spread
Pay 25 Points ($250.00) or better
Max profit potential at expiration is 150 points ($1500.00) (Minus cost of entry + commissions)
Risk is defined to cost of entry (plus commissions)
This spread is unbalanced by design. If the June Canadian Dollar is below the lowest leg of the spread (7300) at expiration, all legs would be exercised. The long 7550-7400 put spread would bring in 150 points ($1500.00) ,and the short 7400-7300 put spread would lose 100 points ($1000), which would be net gain of 50 points ($500.00). Profits would be the 50 points minus the cost of entry.
If you like this trade or are looking for help with any kind of trading strategy, fell free to contact me anytime.
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Sincerely,
John Weyer
John Weyer
Director Commercial Hedging
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