This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Euro Calendar Spread

On September 19th, EUR/USD futures for December expiration touched the highest levels since February as the dollar plunged following the Fed decision to delay a reduction in asset purchases. Since then, the euro has backed off slightly, but record low levels of option implied volatility provide an excellent way for traders to position themselves for the next move.

ECZ13 Futures

Source: TradeStation

Let's review the volatility environment in the euro to determine the optimal structure.

EUR/USD 3M Implied Volatility.

Source: Condor Options

First, at about 8.5% annualized, EUR/USD three month at the money option prices are near their lows for the year. That means investors with natural exposure to a falling euro can buy protection here at levels not available in many months; speculators can position for a drop in the currency in a more cost-effective way.

EUR/USD 3M/1Y Term Structure Slope

Source: Condor Options

Second, the term structure of option premiums is also near an extreme level: relative to the cost of one year options, three month option premiums are near their lows for the year. Put differently: excluding some recent lows in mid-September and a handful of dates in the spring, the contango in the term structure of options on the euro hasn't been this steep since 2013 began. What the attached chart should make clear, though, is that while EUR option volatility can trade in a stable way for long stretches, it is also prone to spikes higher, with short term options being bid up sharply versus longer-dated contracts: the term structure has backwardated several times in 2013 alone.

The following calendar spread has a similar payoff to a long straddle, with one important difference: if stress in European banks or sovereigns flares up in the coming months, or if the dollar strengthens against the euro as a result of reactions to monetary policy changes, traders can expect the IV term structure to flatten, which would benefit a short calendar spread to a greater degree than it would a straddle (in risk-adjusted terms).

Trade: Buy to open the 6EZ3 December 1.345 puts for $0.017 and sell to open the 6EH4 March 1.345 puts for $0.0262.

The position risks about $1350 per spread at December expiration if the futures are near the strike of the options, versus an expected return of about $550 on a one standard deviation move in either direction. We will update this position on any sizable moves in the underlying and will plan on exiting in mid-November.

OptionsProfits can be followed on Twitter at

Jared can be followed on Twitter at

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
USD $74.99 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%
TSLA $240.76 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports