I recently sold an asset and received partial payment in Euro. The Euro has droppoed considerable against the dollar. I've read about "repair" strategies for losing stock positions involving buying a call at current price and selling two OTM calls (Bull Spread) that gets you back to breakeven faster if the stock moves up. Can someone help me with how to set up a similar repair strategy on this position. Am a real beginner.
tks,
There is no singular best way to do this and this does require some knowledge about recovery strategies that involve dissimilar instruments and markets.
You did not mention WHEN you too partial payment in Euro Dollars and that is very important. You are correct, the EUR has moved down against the USD and the slide began with a four (4) month double-top event between April and July 2008. The bottom of that Short move terminated with a five (5) Long side double bottom event between October 2008 and February 2009. The intermediate termination point for that Long sided trade was November 2009.
Though the EURUSD, in all of 2009, was mostly made up of Long sided potential, it did so through an entirely
de-trended year. That means the Shorts were setting up for a January 2010 launch, which has the EUR trading lower against the USD right now.
There are many ways you can construct this and you should seek lots of good advice. You did not mention your Event Horizon for returning to break-even and that is important as well. You also did not mention whether or not you had a near-term need for the cash - also very important to know. So, without some of the most basic questions answered, I can only give you general thoughts.
1) Wait on the EURUSD.
This is April, 2010 and the probability for for EURUSD increasing in price is getting stronger over time. If you have a long enough event horizon for break-even, then you will get your money back on the EUIR side of the equation by simply waiting for the Short sided double-top that is about to start taking shape near the 5141 level.
2) Long Gold Calls / Short Gold Puts.
I assume you were looking to solve this problem outside of the environment in which it was made. To do this, I would turn to something stable. The global economic environment will only hold Gold at current levels or send it even higher. I told people this back in 2007, just before Gold hit its 2006 peak and people laughed at me on the DailyFX forum. Gold is now at $1,200.00 and nobody is laughing anymore.
Just note that historical highs like this will retard the ballistic curve from time to time, but until the global economy works itself out, people will flight their capital to "harder" asset classes and Gold has always been a so-called "safe haven" during times like these. If Gold goes higher, you recovery some Euros on the Calls and keep some premium on the Puts.
If Gold goes lower, you lose on the Calls (only your option premium paid) and you have to deliver on the Puts as well. So, the thing that makes this work, is really understanding WHY Gold is either headed higher, or WHY it
will remain flat. This is a pure probability play and it is dependent on global economic performance. You are going to have to work out the detail and the math on the Call to Put ratios and how much of the remaining Euro Dollars you put to work on this method - no one knows how many Euros you have or when you took delivery of them.
Watch the Intrinsic, Delta and Gamma values of the options you use. For this to work in a timely fashion, you want High Delta and High Gamma values on the options to the upside and preferably low Delta and Low Gamma to the downside of this particular set-up. That's not always optimal, but I can only give general thoughts based on the missing information that you have not provided. This is not for beginners and you really should learn about options before you attempt this or any options strategy - period.
3) Long EURUSD Calls / Short EURUSD Puts.
OTM or slightly ATM EURUSD Calls and Deep OTM Puts, might do the trick. Again, I don't know your event horizon and only you can determine how far OTM you need to go. This is based on the previous analysis (above) on the longer-range outlook for th EURO and it is based on my personal (natural) tendency to be counter the market, just before the market turns. Right now the EURUSD is in a Short market profile, but it is also
de-trending and that by definition means that it is in a pattern or mode for recovery back to the 5100 level, as a longer-range probability- again, I know nothing about your time-line or event horizon for needing to break-even.
The same profit/loss scenario holds true for the currency pair as it does for the Gold spread, so you can re-read that one if you need to. Again, you know what your event horizon is for needing to break-even and you know whether or not you need to cash right way or if you can wait for it to develop. These three are longer-range developments, so if the need is urgent, this is not the set-up for you.
We have not talked about Expiration Dates and/or Theta requirements, but that would be impossible to do, given the fact that I don't know anything about your event horizons. At least this gives you something to think about. There are at least a hundred different ways that you can execute a Recovery Strategy, given what little I know about your scenario and time-lines, so I would continue to research and learn as much as I could BEFORE doing anything. You are holding Euros against Dollars right now and that is not an entirely bad situation to be in all by itself, if the event-horizon is long enough for you.
As usual, do your OWN homework and take responsibility for your OWN outcomes in Trading any market.
Hope this helps.
