Home › Forums › Swing Trades › “Brexit” Trade in FXB
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June 22, 2016 at 2:47 pm #6144Steven PlaceKeymaster
I’m not sure there’s a huge edge here, but this is a decent structure to use.
So we have the Brexit up on deck. Or the vote, whatever.
The general idea is that if Britain leaves the EU, that’s bad for global markets. And bad for the pound (GBP).
KEEP IN MIND– sometimes the market zigs when you expect it to zag. Meaning even if we do “brexit” that doesn’t mean the market has to go full blown risk off.
I think a lot of the risk, especially in the near term, has been priced in as everyone is buying short term options. VXST (short term VIX) is sitting in the high 20’s.
There is one trade to consider. It’s low risk, potentially high reward, and has good structure given the volatility markets.
FXB is the currencyshares etf for the pound.
The implied volatility in this is sitting around 27% — the highest it’s been since the credit crisis in 2008.
So a lot of people are expecting some big movement.
Here’s the thing… we’ve already seen a decent move.
The at-the-money straddle is sitting right around $9. Meaning that the market is pricing in $9 of movement going into Jul opex.
Now the pound has already saw a strong rally. Over the weekend, the Brexit odds got taken down which led to a big gap higher. FXB has run from 137 to 144.
It’s my opinion tht the vol we’ve seen before the event occurrs will lead to lower vol into the event. Hopefully that makes sense.
So here’s the trade:
BUY TO OPEN FXB JUL 142 PUT
SELL TO OPEN 2X FXB 137 PUT
BUY TO OPEN FXB 131 PUTNET DEBIT: .20
Here’s the thinkorswim order:
BUY +10 BUTTERFLY FXB 100 15 JUL 16 142/137/131 PUT @.20 LMT
This is a broken wing butterfly. It has more risk on the downside than the upside.
The trade thesis here is simple: the trade makes money if FXB pulls in *and* the volatility to come out.
If FXB rips higher, then you’re only out .20 per spread.
The max risk is to the downside… if FXB is below 132 into Jul opex, then you lose 1.25 per spread.
That 132 lower breakeven… at the current price of 143, that would need to be 11 points to the downside. The market is pricing in 9 so there would have to be basically a market crash… possible but the odds are in our favor.
Now the implied volatility is going to head back to 15% after the event… maybe it will stay elevated if the Brexit happens, but that’s a good place to start.
If we model just a 10% drop in vol then you can be up over 10% on the position, pretty quickly. If we see some back and fill, it will be even greater.
This is an event-based trade. It’s almost like an earnings trade, so if you aren’t comfortable with the risk, then don’t play it.
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