It's the CAD or the CDD

The chart was the Usd/Cad intra-day. As you can see I told you not to chase the trade because I expected it to come back up. Because it has come back up, is there a buy or a sell in this trade. I don't think we have seen any reason to be looking for a long trade on this pair. It is a pull back that can make money management difficult but could be a great longer term trade. How far will it pull back? Since I did this screen shot the price has risen back to 1.0035 and is still climbing slowly. I would like to sell this again but at the right time. Maybe near 1.0050 or 1.0075 but I wouldn't be surprised with a pull back to 1.0100 or even 1.0200. I seriously doubt a move to 1.03 before a drop.

So here is the trade I am looking at...a put on November 100.00 CDD. What is that? CDD is the International Security Exchange (ISE) option that trade the major currency pair. As you can see on the daily charts of the CDD, the price is in line with the spot market. The stochastic is possibly setting up for a short term divergence to sell of this pair. The advantage of the CDD over the spot market in this situation is being able to sell with a max loss, similar to a stop loss but the price can move beyond a traditional spot stop loss and still come back down and make you money as it move toward your price.

Currently the price is sitting at 1.0040, as I type the price is rising slightly, if I sold the pair now in the spot market with 150 pip stop, the pair could move to 1.0200 and push 10 pips past your trade and then move all the way back down and through the key 1.000 mark and potentially down to 0.9800 or lower.

For the CDD position, first let's recognize that the 1.35 price of the 100.00 put will cost $135 per contract because we buy them in 100 unit contracts. So when I reference pennies and dollars on the options contract, multiply it by 100 to get the per contract value. Now, let's use the 100.00 put this is the same as the 1.0000 price level on the spot market. If my anticipation is that it could go down to .9800 the value of the put at expiration in November could be worth 2.00.

The difference between the purchase (1.35 for the November 100 put) and the estimated value at expiration is only .65. That may not sound that great, but remember I am saying at expiration it would be worth that. Hopefully as it nears your limit you will step out with more than the 2.00 per option price. If you set this up as a bear put spread and sold the 98 put and bought the 100 put, the net difference of the spread is a cost of .85 with a max gain potential of 1.15. It nearly doubles the expected gains but it does cap the trade on both sides.

Max loss .85 (similar to a 85 pip stop but it can go beyond the level without getting stopped out) and a great target. Take a look at the prices here and we will watch this trade over the next couple of weeks. We will track it both as a spot trade and an option trade to measure both risk and reward for both trade potentials.

Good luck, more tomorrow.