Monday, May 23, 2016

Hedge the Headwinds with FX ETF options

Forex continues to mystify many investors, and accountants too. Yet, Forex becomes every day more and more, the most significant tail risk to any portfolio. British stocks?Here's a potential Brexit smashing the GBP. Only invest domestically? Just wait for another otherwise excellent company to report billions of losses due to "Currency Headwinds." Checkout the latest Forex blunder, from SABMiller (OTCPK:SBMRY):
SABMiller (Xetra: BRW1.DE - news) 's total beverage volumes grew 2% during the year, with lager volumes up 1% and soft drinks volumes up 6%. Reported EBITA dropped 9% to $5.8bn and grew 8% organically and at constant currencies, with adjusted earnings per share down 6% on a reported basis and up 12% on an organic basis to 224.1 cents. SABMiller blamed the reported declines on the depreciation of "key operating currencies" against the US dollar.
In different accountant-speak, more pure and not changed into recognizable English language by editors and reporters:
...the group delivered "good results" for the financial year, despite currency volatility hitting the bottom line. For the year under review, revenue decreased 10% to $19.8-billion, with group net producer revenue (NPR) falling 8% to $24-billion, as the strengthening dollar against operating currencies had a material negative impact on the reported results. However, underlying revenue and NPR grew 7% and 5% respectively as group beverage volumes increased 2% during the year under review.
Which class did we miss in College that teaches accountant-speak? Just rough calculations, an 8% fall to $24 Billion is about $2 Billion, so by their language, losing $2 Billion is 'good results' - I'd hate to see a bad quarter. But it's popular now on Wall St., blaming "Currency Headwinds" on a lack of Forex knowledge & education, and losing Billions. Forex hedging is cost effective, and with a qualified manager, simple to implement; as explained in Splitting Pennies - Understanding Forex. It's not even necessary to open a forex account - you can hedge with currency ETFs and ETNs.
So if Forex is confusing to you, don't worry. It's also confusing for multi-billion dollar global corporations. But that doesn't mean you can't profit from it, or protect your portfolio. There are a number of ways to do it, without even opening a Forex account. One way is to leverage Forex ETFs, available right in your equities brokerage account. Forex ETFs include (NYSEARCA:FXY), (NYSEARCA:UUP), (NYSEARCA:FXE), (NYSEARCA:FXA), (NYSEARCA:EUO), (NYSEARCA:CYB), (NYSEARCA:DBV), (NYSEARCA:FXF), (NYSEARCA:YCS), (NYSEARCA:FXC), , (NYSEARCA:DRR), (NYSEARCA:USDU), , (NYSEARCA:FXB), (NYSEARCA:UDN), (NYSEARCA:CEW), (NYSEARCA:FXS), (NYSEARCA:BZF), (NYSEARCA:CROC), (NYSEARCA:CNY), (NYSEARCA:ICN), (NYSEARCA:ULE), (NYSEARCA:FXCH), (NYSEARCA:YCL), (NYSEARCA:CCX), and others. We'll take a look at just as an example, because of its popularity. trades like a stock - you can buy or sell at any time, without restriction, and pay a stock commission. Some brokers may charge an extra fee because it's an ETF, but most don't.
What's great about these contracts is the options. Just like you can buy and sell calls and puts on major companies like (NASDAQ:AMZN) and (NASDAQ:AAPL), you can too, for .
Option volume & statistics for :
(click to enlarge)
There's a lot of volume for puts and calls, this was "Today's Volume" on Friday, May 20th. Now look at the option chain for January, 2017 options for :
(click to enlarge)There's a lot of activity, and as you can see - plenty of options, at the money, out of the money, and deep out of the money. That means, that by playing deep OTM options on , it's possible to speculate on rare low probability, high impact 3 sigma events, like the Brexit vote coming up, or such as happened with the CHF revaluation.
The best Great British Pound ETFs are and (NYSEARCA:GBB) - is actually an ETN. More about :
The Currency Shares British Pound Sterling Trust ETF is designed to provide a simple means for investors to obtain exposure to the profit potential in the value of the British pound sterling as measured against the U.S. dollar. The trust issues shares that represent units of fractional interest in the GBP/USD exchange rate that shows the U.S. dollar price of the British pound sterling. The value of the shares increases in correlation to increases in the GBP/USD exchange rate.
For to bet on a Brexit or non-Brexit, Jan 2017 are good options, with good Delta and Theta (good meaning, not too much, not too little).
It should be an interesting week in FX. This statement can be repeated every Sunday before the markets open. This week's key points to watch:
  • USD stages recovery as Fed rhetoric lifts June rate-hike prospects
  • Easing of Brexit fears could spell further near-term GBP recovery
  • CHF weakest vs euro since Jan 2015 revaluation, look to long USDCHF on dips
  • Bulls will look to stay long USDCAD as long as it stays well above 1.3000
  • Spot traders could look to fade EURGBP rallies into 0.7700 area for try below 0.7600
  • Options traders might set long EURGBP put spreads or long GBPJPY call spreads
  • Traders will look to buy AUDCAD dips for a try back toward 0.9600-0.9700 zone
In conclusion, don't fear Forex, it's easy to implement a hedging program, and can be done with minimal cost and effort. The best place to start - is right in your own equities account.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.