Options: Rising Wedge Suggests Euro May Reach $1.50: Technical Analysis

(Bloomberg) -- Trading patterns suggest the euro may strengthen to $1.50 for the first time in more than a year within six weeks, according Calyon, the investment banking unit of Credit Agricole SA. The 16-nation currency’s move this week above resistance formed by an upper trend line from a so-called rising wedge formation at $1.4524 signaled the euro’s gains are poised to continue, wrote Simon Smollett, senior foreign-exchange options strategist in London at Calyon, in a note yesterday. He advised clients to use an options trade to capitalize on the move.“The upper trend line has now broken at $1.4524, which seems encouraging,” wrote Smollett. “This kind of pattern is worth following as it is not especially prone to false breakouts.”

The euro appreciated 0.5 percent yesterday against the greenback to $1.4557, after touching $1.4601, its strongest level since Dec. 18, as record low U.S. borrowing costs encouraged investors to sell the dollar and buy higher-yielding assets. The currency last topped $1.50 on Aug. 11, 2008.In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index. Resistance is an area where sell orders may be clustered, making further price increases more difficult. Support is an area where buy orders may be clustered.

Seagull Options Spread
Smollett recommended that investors purchase a so-called seagull options spread to bet on euro gains. The strategy involves buying a euro call spread, which is the simultaneous purchase and sale of call options with different strike prices, and also the sale of a put. Call options grant the right, but not the obligation, to buy the currency at a pre-set price, while puts allow for sales.The call spread portion of the trade involves the purchase of a six-week euro call option at a strike price of $1.45 and the sale of a similar maturity call with a strike price of $1.50. The final leg of the seagull spread is a sale of a put at a strike price of $1.40.
The trade would break even, netting no profit or loss, if the euro appreciates just to $1.4637 and would yield gains upon a move above that. Potential losses are unlimited on the put option sold if the euro depreciates below the strike price of $1.40.