The Swiss Nation Bank (SNB) threw the world for a loop the other day when they took off their Euro Currency peg. There were many individual investors that were completely wiped out due to the way that Forex leverage works in the retail market. Forex leverage for retail trading is often as high as 50:1, meaning that you can move a notional value of $10000 buy putting up just $200 in margin. Pretty dangerous if you're involved in currencies that are artificially pegged to other currencies that are manipulated. Wow.
Anyway, other entities that were damaged by the SNB were Forex brokers that serviced those retail customers. One of these was my own Forex Broker FXCM. When I first began trading currencies, I went with FXCM because of all of their educational content, and their focus on conservative capital management and risk controls. It seems that they practice what they preach. While many Forex brokers around the world were instantly insolvent, FXCM was able to secure a cash lifeline and continue operations as normal, albeit with significantly more debt than they had before.
So what happens to the common stock of a company that takes a $200 million loss in one day? The stock trades down to $1.28 a share in two days. What happens to the same stock when the company is not insolvent? The share value doubles in two days.
While I believe that the shares are pretty accurately priced given the damage to the company, I am also confident that management will continue to operate in a profitable way, and that the financial health of the company will increase as time goes on. I want to be long FXCM.
Based on the recent acute decline in prices of FXCM common stock, The puts have a ton of premium that I want to take advantage of. I was delighted to find that FXCM has options trading out to August of 2015 from 1 to 5 dollar strikes and higher, and the open interest and volume are making for very tight spreads.
As a replacement for going long common stock, I intend to go long FXCM using a spread called a risk reversal. Obviously I intend to profit from this trade sooner than August, but I often use duration as risk management tool. Even if I get put the stock for $2.50, my thesis isn't going to change long term, and the price of the stock is so low, I can't loose much as this is a small position in my portfolio. I just want to take advantage of a perceived opportunity.
I am selling the August '15 $2.50 puts to pay for August '15 $5 calls. I am looking for $.25 net credit per contract. My max loss is the same $2.50 that I could be put for each contract at or before August expiration. There is no cash outlay for this trade, only the margin covering the cost of the short puts.
I will update this trade here and on twitter @B50cal1978
Please drop any comments or questions you may have, as I love a good conversation.
Good luck trading!
STT
Makes sense if you like the stock & the vol skew is in place. I have a very small account with FXCM as well (got transferred with the IBFX retail FX purchase).
ReplyDeleteI think you meant ... selling the August '15 $2.50 "puts"
I absolutely did mean selling the Aug $2.50 puts. Huge my bad! I scrubbed for spelling and I missed that one. Thanks for pointing it out. The edit is in place. I got instantly filled for .30 cents credit, lowering my basis to $2.20. I actually got filled so quick that I regretted not starting at $.50 and walking the order down.
ReplyDeleteFXCM is stable around the $2.15 level even in a down market. I have $5 calls out in August that I think will be fine if the payments back to Leucadia go as planned, and they can reduce their debt ASAP. Just because they took 300 million dollars, doesn't necessarily mean that they needed the whole amount. Since the shock is well past, cooler heads can now prevail and figure out to make more money for everybody. I think that if FXCM can get up to near the 5$ level that they may be able to make an offering of common stock to pay off Leucadia, bring in a couple new institutional investors and knock down that debt. Avoiding significant dilution is probably the benchmark for whatever deal my be cut.
ReplyDelete