Profits In Currency Options Better Than Stocks

| April 16, 2008 | 0 Comments

Have you looked at the S&P 500 lately?  The S&P 500 is an index of the top 500 companies in the stock market.  It’s supposed to measure how well the market is performing.  Yesterday it closed at 1,334.  This is a stunning number.

You see, the S&P 500 first reached the 1,334 level in May of 1999.  Nine years ago.  If you invested your retirement funds in the S&P 500 nine years ago you’d have basically broke even (except for a few dividends). Now, you would have had the distinct pleasure of suffering heartburn, hair loss, and premature aging from all of the wild market gyrations.  All while watching your investments go nowhere.

That’s a long time to wait for a miniscule return.

You don’t need me to tell you the markets have been difficult lately.  So, I started asking my contacts what they were looking at.  Keep in mind that these are not just random people off the street.  The people I was talking to are brokers, advisors, and hedge fund managers.  These are smart people who are making money in the market – day in and day out. The answer I got was surprising.

These professionals weren’t looking much at stocks or bonds.  Only a few were looking at private equity.  What they’re focusing on are markets with major trends.  The two best right now: commodities and currencies.

We all know about commodities and how they’ve done.  But not everyone is clued in to what’s going on in the currency markets.

Investors have traditionally avoided the currency markets.  You used to need millions of dollars in capital just to set up an account.  And the risks of futures trading were just too great for most people to stomach.

Today a number of new securities are available that make it easy to profit from the monumental trends in place in the currency markets.

You can now buy currency ETFs and even trade currency options on the Philadelphia Stock Exchange.  This makes it easy for small hedge funds and individuals to trade and make money in these huge markets.

So, what ‘monumental trends’ am I talking about?

The one in the US Dollar.  You see, the US dollar has been sliding for several years now.  It continues to hit new lows against many of the world’s major currencies.

   The popular press is starting to pick up on all this.  But what they report on can be quite confusing.  Some market analysts are calling a bottom, while others believe we’re heading much lower.  Both groups fail to recognize some of the important changes happening around the world as we speak.

What exactly am I talking about?

News from South Korea and Venezuela.  Most mainstream news sources passed over these important news items which could prove vital to future currency fluctuations.

Just last week South Korea’s National Pension Service announced they’d no longer be buying US treasuries.  Why is this important?  In absolute dollars South Korea’s not that important.  Their fund invests $220 billion in assets with about $14 billion in US Treasuries.  A drop in the bucket when compared to the overall $4.5 trillion US Treasury market.

But what it may start could be a real concern.

International investors are now shunning US assets with low yields for other investments.  Think of it this way, when investors in South Korea buy US Treasuries they first convert their home currency (the Korean Won) into US Dollars.  This creates demand for US Dollars.  If they stop buying treasuries then they stop buying the US Dollar.  Demand disappears . . . not good news for the US Dollar.

The serious damage could be done when other international investors take the same path.

In Venezuela we are seeing similar events, but with different participants.

Just last month, Venezuela’s state oil company started signing contracts for oil denominated in Euros.  This is a huge departure from tradition. Around the globe oil has always been priced in US Dollars, creating a constant demand for our currency.

Because the US Dollar has been sliding, oil producers have started grumbling about the falling value.  Venezuela is still a minor producer on the world stage when it comes to oil.  Their actions won’t have a direct impact on the US Dollar.  What they have done however is open the door for other oil producers to take the same path.

Taken independently none of this is significant.  When you start to piece it all together, along with global economic performance, you realize quickly the direction the US Dollar will head.

Profiting from this trend doesn’t need to be complicated.  If you’re going to trade these markets I encourage you to have a fundamental understanding of the global economy.  Remember small news events can lead to big profits.

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Category: Currency Trading

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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