Back to the Dollar Trade

We bought back our June SPY calls and sold our UUP call yesterday to realize profits of 90% and 95%, respectively. If you haven’t closed out those trades yet, please do so today. We will put on more exposure in those two areas in the near term.

We want to bring up one point on the UUP trade that we believe highlights the benefits of incorporating options into your trading strategies. Our profits of 95% came on only a 2% move in the underlying ETF UUP share price, while only having 39 cents at risk on the entire trade.

To us, that seems like a pretty good risk-to-reward profile in a market that is trading sideways. Just to recap, we continue to believe the S&P 500 is capped for at least the summer and selling premium in a range-bound market is the best strategy.

We believe the rally we have seen over the last couple of days will test the high end of the range again at 2,100 on the S&P. But ultimately over-bought conditions at those levels will bring the market back down.

With respect to the dollar, the latest Fed minutes and comments from Fed officials have pointed to the potential for a rate hike in June and/or July. In fact, the market has handicapped the probability of a rate increase in July to almost 57%, when only two weeks ago the probability was probably closer to a zero percent chance. This adjustment in rate-hike expectations should raise the price of the U.S. dollar.

Today, we want to take advantage of what the market is giving us and redeploy exposure into UUP again. When you get this alert, buy to open the UUP September $25 calls (UUP160916C00025000), which last traded at 35 cents and expire on Sept. 16. While we believe the stock market is range-bound, we think it would be prudent to let the rally play out before executing another SPY trade.

Sincerely,

Doug and Tom