The Japanese yen has experienced a relatively significant devaluation against the U.S. dollar. The currency has fallen approximately 7% from its October high, making it a candidate for a "too far too fast" argument. The October peak is relatively common in the yen due to money flowing back into the U.S. for year-end tax adjustment purposes (repatriation). But the selling typically dries up in early December, and prices often retrace higher going into year-end.
There are never any guarantees in trading, but putting the odds in your favor can go a long way. The yen could certainly continue lower, but this scenario isn't appealing. Those who made money on the way down should look to lock in profits, or at least hedge their bets. Those who are looking to begin nibbling on the long side of the market might look at today's dip as an opportunity to do so with strategies that benefit from a reversal -- or at a minimum, a pause in the selling.
Shifting toward the chart, the yen has been struggling to hold its ground in recent months, but is approaching significant trend-line support on a weekly chart. We feel the odds favor the market holding these levels, or at least suspending its decline. In addition, the December currency futures are expiring soon and we feel like this could be exaggerating the current leg lower.
If we are right, today's overpricing in the put options market should quickly erode to the benefit of option sellers. We like the idea of selling the February 1.15 yen puts for about 35 ticks, or $437.50. As always, selling options involves theoretically unlimited risk. The profit potential is $437.50 minus transaction costs and occurs if the option is held to expiration and the futures price is above 1.15 (depicted as the red line on the chart above). We anticipate the net margin on this trade to be $1,000.
Another way to play this market that faces lower margin requirements and arguably less risk, is with the e-micro currency futures contract, or even mini or micro positions in the foreign exchange (FOREX) market. Because this is intended to be a relatively short-term trade, using an ETF such as the FXY probably isn't efficient.