The June Australian dollar futures contract is trading lower Friday. It appears that further tightening of credit in the near term seems less likely following comments by Australian central bank Governor Glenn Stevens who was quoted as saying rates are "close to average."
Stevens went on to state that policy-makers are focused on ensuring a sustainable economic rebound. These comments are driving the aussie lower with the currency trading down vs. its 16 major counterparts. Even if rate hikes are on hold in the short term, I feel that as investor risk-appetite continues to improve the aussie can continue to benefit. In addition, if we continue to see higher commodity prices the currency will benefit.
The aussie has been trending higher since February and looks to have considerable support on a daily chart around the 90 level on the June futures contract. Because of these factors, I feel this currency will continue to trend higher against its major counterparts.
Here are two ways to try to take advantage of the currency trading lower right now.
Sell the June 88.5 put option for a premium of $470 or better. Assuming commissions and fees of $50 a contract, this would leave the investor with a net premium collected of $420. This position profits if the June futures contract is at or above the strike price at expiration. The position breaks even with June futures at 8808.
The risk on this position is unlimited. An investor can lose if the June futures contract is below the break-even of 8808 at or at any time prior to expiration. This is a marginable position, and therefore an investor can also lose money if the market makes an adverse move prior to expiration generating a margin call and the investor is forced to close the position.
The position value can fluctuate very rapidly and at times experience wild swings and an investor could close the position with a loss prior to expiration without a margin call. An investor must determine his or her own tolerance for risk.
In terms of Australian dollar futures, an investor will lose $10 per point that the price falls under 8808. The risk of loss is substantial. Selling of options isn't suitable for all investors; an investor can lose more than the original investment.
Buy a July 94 call option for a premium of $560 or better. This position can potentially profit if the September Australian dollar futures rise above the strike price of 94 at or before expiration. The maximum risk when purchasing an option is the premium paid -- in this case the investor cannot lose more than the $560 premium plus $50 in commissions and fees for a total loss of $610. I recommend holding this position for no longer than four weeks.
Due to the time decay aspect of options, if the market does not move the way I am anticipating within that time frame simply sell the option back to the market at the current market price and look to reevaluate.
Matt Zeman is a principal with Lasalle Futures Group and chief market strategist for Time Means Money.Com.