Blog > International Investing > Blog article: Options Trading: Profit from the falling dollar
 | Email This Article Email This Article  | 

Options Trading: Profit from the falling dollar

Posted January 3, 2008

“Overseas investors are seething at U.S. policy makers. Not only are we forcing them to pay through the nose for oil, we are destroying the value of virtually all their U.S. investments, regardless of category.” — Adam Lass, Market Report

by Adam Lass

Baltimore – (TFN): “Oil hits $100!”

There are two ways to view that historic headline. On the one hand, you could take the tack (as has virtually all of the major media) that this is a speculative move based solely on the idea that there ain’t enough of the black stuff to feed the growing global craving.

The talking heads rave about desperate gas station managers in China shutting down pumps for want of supply and Indian factories going dark for lack of electricity. They rant about bands of armed men attacking police stations and hotel lobbies in Nigeria, and winter storms closing Mexican ports.

All these events have certainly come to pass. Chinese and Indian economic growth is reconfiguring demand estimates for the next decade. And recently released studies show that OPEC may very well come up short supply-wise… come 2024.

“Y” Is Oil Measured in Dollars?

But while the price of oil 16 years from now makes for a fascinating, and perhaps even necessary conversation, these facts are as germane to today’s headlines as they are to the price of tea in China.

Every discussion of an asset’s value is, in reality, an algebraic equation: X equals Y. In the case of oil, X is commonly a 55-gallon barrel of light sweet crude as priced at the New York Mercantile Exchange futures market.

~~~~~~~~~~~~~~~~~~~~~~~~~~~

Experience the upside of the Japanese real estate market-and the upside only.

You can with the new MarketSafe Japanese REIT CD from EverBank. The latest addition to EverBank’s award-winning line of market-based CDs, this new version offers a unique opportunity to tap into the Japanese real estate market with no risk to your principal deposit.

At the end of the 3.5 year term, you’ll receive all principal, plus a Market Upside Payment that reflects 100% participation in the term performance of a specified index that tracks the performance of Japanese Real Estate Investment Trusts.

Account fees: None. Low minimum: $1,500. Learn more at Everbank.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

But what about Y? Generally speaking, it is accepted that while oil is globally fungible, it is priced in American dollars, a hangover from the halcyon days when landscapes from Pennsylvania to California were replete with derricks.

The U.S. Dollar Got Crushed in ’07

But while our X is a static value, our Y (the U.S. dollar) is quite capable of wandering all over the darn place. Within our little American fishbowl, Washington has allowed — some would say even encouraged — inflation to diminish the dollar’s value by some 24% over the past five years.

Now in 2007, our fishbowl may or may not have been a comfortable place, depending on whether you are a housewife trying to pay your power bill and feed your brood, or a Wall Street exec happily cashing your million-dollar “performance” bonus against a stock market that managed a paltry 3% gain.

But when you peek over the bowl’s rim, things begin to look rather ugly. Here we must compare apples to apples and currencies to currencies. 2007 saw the dollar lose against the following major currencies:

- 1.96% against the British pound,
- 2.14% against the South African rand,
- 6.6% against the Japanese yen,
- 9.33% against the euro,
- And 17% against the Brazilian real.

Oil Up, Dollar Down Again in ’08

When you look outside the fishbowl, U.S. stocks’ purported 3% rise begins to look an awful lot like a substantial net loss. I will come back to this point in a moment.

But first, let’s go back to that Y in the oil equation. Here too, the diminishing dollar plays a critical role. Remember the headline I began with. For 55 gallons of crude oil to reach that magical $100 threshold, its putative “value” in U.S. dollars in New York had to rise 4.19% in a single trading day.

But all those oil speculators pushing up oil had more than a little help from Washington’s weak dollar policies, because while oil was going “up,” the dollar was falling another 1% or so against the euro. It lost more than 1% against the Brazilian real. And it peeled off nearly 2% against the yen, again all in a single trading day.

The Big Money Is Leaving the Party

Enough mathematics for a moment; let’s deal instead with concrete results. Overseas investors are seething at U.S. policy makers. Not only are we forcing them to pay through the nose for oil, we are destroying the value of virtually all their U.S. investments, regardless of category.

Real estate? Trashed! Banks? Available for 10 cents on the dollar! Bonds? Suspect at best, and most probably junk. Stock shares? The very first trading day of 2008 saw the Dow lose 220 points.

If you are outside the fishbowl, the water looks rank with no prospects for a cleanup anytime soon. Some of the more adventurous overseas powerhouses may be attracted to U.S. junk bonds (the usurious rates Abu Dhabi’s sovereign wealth fund extracted from Citigroup in exchange for its $7 billion bailout comes to mind).

Get Out Ahead of the Crash and Make 360% to Boot

However, in 2008, the vast majority of this very mobile money will be looking for a home just about anywhere but the U.S. And when they do abandon our companies, our bonds and our dollar, the drop will make last year’s oscillations look like a picnic in the park.

If you are inside the fishbowl — get out, soonest! My advice for a first step toward international diversification? Select call options against Rydex’s CurrencyShares Euro ETF (FXE: NYSEArca) are sporting a delta of 0.63.

That means they will pick up 18% for each of the $13-$20 I expect the FXE to pile on. Making gains as high as 360% are certainly reasonable here.

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. You can pick your favorite reader. Or if you prefer, you can have the feed delivered to your email.


Related Articles


Posted by Adam Lass · Filed Under International Investing 

Comments

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus