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IRA EPSTEIN & COMPANY
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(August 14, 1997) CURRENCIES: Currently I am recommending an option strategy in the December contract of the Japanese Yen. The strategy is called a “long strangle.” To enter this trade you buy both a put and a call at two different strike prices. If the market explodes in price, regardless of direction, you make money; if the market stagnates, your loss is only what you paid for the premiums including commissions. I believe this is a great way to play both sides of the market.
Decay of the premiums accelerates as options approach expiration, but to avoid a larger part of decay, the position should normally taken off well prior to expiration.
To enter this trade, I would probably buy the 90 call and the 86 put.
Kyle Graham
GERMAN MARK–The D-mark had a spirited rally late last week as the market reacted to the U.S. bond market action. A good portion of the upward move was erased in the following days as the dollar's technical and fundamental position deteriorated. On Wednesday, the D-mark benefitted from reports of strong 2nd quarter German manufacturing orders, both foreign and domestic. The latest German construction numbers also appear to be stabilizing factor.
Although traders will continue to focus on the struggling German economy and EMU developments in making trading decisions, the specter of events in the United States will draw more attention. I believe shorting the D-mark is the way to trade, but I would not be surprised by sharp upswings on positive news.
JAPANESE YEN–The yen made a substantial up move last Friday as word of the results of U.S. bond action hit the market. The rally extended to 8810 before new short positions pushed the price back down. There is little news that would indicate a change in over all direction coming from the Japanese banking sector. As the U.S. stock market tumbled in response to the bond news so did their Nikkei market. Presently the BOJ seems content to remain on the sideline as long as the yen maintains above 8300. Market forces have tested the downside, but there has been limited follow through.
I believe a trader must use all the information available to find opportunity to profit in a range bound markets such as we are currently experiencing. Good trades can be found on both sides of this market, but initial order entry position and placement of stops become even more important then in a trending market.
SWISS FRANC–The Swiss Franc staged a strong rally against the dollar, but failed to penetrate resistance at 6750. I expect that the Swiss Franc can fall back and test recent lows against the dollar and also fall in relation to the D-mark if the German economy improves. Swiss economic concerns are tied to their exports, and as long as the threat of inflation remains in check the Swiss Franc should continue lower.
STERLING–The Bank of England monetary policy committee did raise interest rates a quarter of a point last week, but the sterling still continued to fall after a statement by BOE chief economist Mervyn King's that there would be a pause in the U.K. interest rate cycle. The monetary policy committee's report concluded that their efforts had now reached a position at which it should be possible to pause in order to assess the direction risks to their inflation are likely to come from. Sterling has given ground to the other major currencies as traders unwind long-term positions as the current round of BOE support comes to a close. I think traders should look at buying the sterling as prices approach the 155 level, as I see this level as a near-term floor.
FUNDAMENTALS–The strong American economy has hit a few bumps in the road. The latest bond action and the U.P.S. strike have raised inflation concerns effecting the stock and bond markets. There is a strong likelihood that the federal reserve will raise interest rates a quarter to a half percent before the end of the year to head off an inflationary cycle.
TECHNICAL–The charts are still bullish the dollar. The rallies of August 8th were fundamentally based, and while halting near-term down trends did not violated upside resistance. I expect consolidation over the next week that will energize the market when it breaks out.
I find the foreign currency markets provide traders with unprecedented opportunities, because they trade 24 hours a day. When the U.S. markets are closed the Asian and European cash markets are traded.
Mark Kaiz
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