You may have gotten a lot of articles in your inbox lately about Brexit and what it could mean for you.
What we already know is that June 23rd is the date in which Britain holds its referendum (or votes) to either stay in the European Union (EU) or not.
We also know that there seems to be about an even 50/50 split between those wanting to remain in the EU and those who don’t.
But there’s one thing we don’t know yet…
And that’s how us traders can make money off of Brexit – right now.
So I’m going to show you…
Consider Using Options to Play Brexit Before June 23rd
As you know, Britain votes to either stay in the European Union (EU) or not on that June 23rd. Prime Minister David Cameron promised that referendum would happen – for the first time since 1975. But until June 23rd, he’s doing his best to sell voters on staying IN the EU.
According to Cameron, there are things Britain does not like about being in the EU, such as immigration concerns and having to give up the ability to run their own affairs. Another stickler point is that Britain wants to continue using the pound as its currency. The vote isn’t about whether or not to leave the Eurozone because Britain has never adopted the Euro. So in that sense, Britain’s already got one foot out the door, and this vote will decide if the other foot gets out the door too.
There is the UK Independence Party and about half of those conservatives that want to leave because they believe there are just too many rules being forced on businesses – and the fees being paid are too much.
Cameron also says that if Britain remains in the EU after the vote, it will gain special status that can help to resolve some of those issues that are bothering British citizens. And from the looks of it, he’s got a pretty solid amount of cabinet members backing his view as well.
That has investors, traders, and the markets alike wondering a few things…
Is it a good thing or a bad thing if Britain leaves the EU? For whom is it good, and for whom is it bad? And what are the global ramifications – and what could happen to us here in the U.S. specifically?
Now there are other factors weighing down the European economy, but the fact that Britain may vote to leave the EU may cause a domino effect… meaning, if Britain says it’s out, other countries in the EU could decide to make the same move.
We just don’t know what will happen right now.
But we do have options… pun intended.
And as options traders, we want to look at what’s happening in between the Euro and the U.S. dollar – or look at trading tool we can use that tracks it, like the Guggenheim Currencyshares Euro Trus (NYSE: FXE).
If you look at the chart above on FXE, you can see that it’s currently pretty much trading in the middle of the range. I’ve emphasized in the chart the horizontal resistance area line and the ascending support line.
The trend over the date range I’ve highlighted in the chart is an overall uptrend. And some of the questions technical anaylsts and traders are asking are whether or not this trend will continue – or if it will reverse…
My assessment right now is that it’s in a no-man’s land position on the chart. So your potential option strategies are to go long calls or go long puts – or look for a possible credit spread opportunity based on what this ETF may or may not do, like NOT trading above $113 or NOT trading below $108.
Think of Brexit Like an Upcoming Earnings Announcement
Another way to treat the upcoming Brexit vote is like an earnings announcement.
When you’re looking to trade around earnings, one of the best strategies you can use is a straddle. A straddle is a trade where you buy a call abnd put at the same strike price with the same expiration date simultaneously on one order. What makes a straddle so great is that it helps you profit regardless of which direction the stock goes.
The key to making a straddle work is this: an upcoming, date-driven catalyst (like Brexit). That way, you know whether the stock (or ETF) is going to pop or drop on the date of a specific announcement or decision. And your goal here is to have it pop or drop significantly enough to cover the cost of the straddle while still capturing profits.
We’re going to take a look at a current straddle situation per my own tools’ options chain, but keep in mind that this is to illustrate what a straddle is and it can make you money – I’m not actually making a trade recommendation to you…
Now the ETF itself is currently trading around $110.50 as of the time I’m writing this. So the option chain lists options that, as fate would have it, list a $110.50 strike for both the calls and the puts.
This means the straddle has strikes that are right at-the-money (ATM) for the underlying asset. This is how a straddle is usually constructed – with a call and a put with the same expiration month and the same ATM options bought-to-open.
Your total cost of this straddle is $2.32 (calls at $1.17 + puts at $1.15 = $2.32). You can assess that $2.32 as the amount the markets are pricing that this ETF could move higher or lower.
A $2.32 move higher would make FXE trade at $112.82 (based on the trading price of $110.50 I mentioned above). A $2.32 move lower would make FXE trade at $107.68. Both of those prices are at the respective resistance and support lines. This pop or drop to those prices likely will not provide an opportunity for a double, so going one week further out to expiration with the same strikes could provide you with an extra bit of time for FXE to work higher or lower to the point at which you double your money.
As an example, the July Week 2 straddle above would only cost $2.55 or $0.23 and would buy you that extra week of time.
And when it comes to Brexit…
Britain may still negotiate deals with the EU if the vote to leave ultimately wins. While that would alleviate some of the concerns you’ve probably heard about Britain leaving the EU, it won’t necessarily make things easy going forward.
As traders, we should look for opportunities to take on either bullish or bearish trades after Britain votes on June 23rd and the subsequent price movement of FXE.
But our main objective today is how we can make a profitable trade right now.
Until next time…