Business-Insider

As any investor who has been profiting from the carry trade during the past few years knows, the Japanese yen (JPY) has been quite volatile lately---which has ripped a lot of profits out of carry traders' pockets. A few days ago, I posted a video about a strategy I've used (the covered carry trade) to allow me to stay in my carry trades and collect my rollover interest.

Click here to see the previous article: http://www.pfxglobal.com/index.php?o...399&Itemid=188

Since then, I've received a few questions via MyPFX regarding Covered Carry Trades, and I wanted to answer them here so everyone else could see the discussion.

Question #1: "In the example you gave on the GBPJPY trade, the strike price for the covered call is 217.00. If we were to set our stop loss in the GBP/JPY trade at 217.00, wouldn't we be in a risk free situation while still collecting the interest diferential for the trade?"

Answer #1: Setting a stop loss at 217.00 would eliminate much of your risk, but it wouldn't be risk free. Here's the reason. If you get stopped out of your spot trade, you are still short the call option. If the pair turns around and moves higher after you get stopped out, you can lose money on the option.

Imagine the pair drops, stops you out at 217.00, and then turns around and moves back up to 218.00. Because you are still short a call option with a strike at 217.00, you would be down 100 pips.

Question #2: "I was very interested with you covered carry trade video. My question is around how to manage the deal if you are close to the point when you could make a loss. In your example, this would be around the 216.70 level. Would the easiest way to do this be to just stop yourself out on the spot position and buy back the call? In your experience, what is the best way to limit your risk?"

Answer #2: You can exit your call option when you get stopped out of, or otherwise exit, your spot trade when the price drops down to your breakeven point. This is usually the best thing to do. However, you will have to buy your call option back for whatever it is worth at the time.

Even though your call option will not have any intrinsic value if the currency price drops below the strike price of the option, it will still have extrinsic (time) value. This could be anywhere from 10 to 150 pips---depending on what your expiration date is. Buying this option back will result in a loss on the trade, but a small loss.

You can see that there is some risk involved in this trade if it goes against you (sorry, no free lunches yet). You will certainly limit your downside losses and give yourself a nice cushion to stay in the trade for as long as possible, but things can still move against you.

To see the remaining 3 questions and my answers to them, click here: http://www.pfxglobal.com/index.php?o...632&Itemid=188
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by John Jagerson

Following a strong correction yesterday, after the FOMC release, the USD has begun to weaken against most of the majors and particularly against the commodity currencies. The USD's slide is only exceeded by the JPY, which has made up all of last session's losses on the USD/JPY.

The bias for risk has shifted overnight as investors begin anticipating further action from the US Fed in the short term to resolve or control the issues in the credit market. Amongst many things, that may mean a mid-period cut to the discount rate and/or changes to borrowing conditions from the Fed, which should continue improving the credit market situation.

Just based on volatility, I am still anticipating a concentration of risk in the commodity currencies and a potential short squeeze on the JPY but as a carry trader, this is nice market action. Because trader expectations are driving the market currently, we should be very conscious of newly released news and hedges or appropriate stops should continue to be in play.

If you are interested in a diversified version of the carry trade strategy, click here to see our learning group on the subject: http://www.pfxglobal.com/index.php?o...stcat&catid=42

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The news that 5 central banks are "teaming up" to fight credit market issues has dominated the forex today. Atlhough this sounds good, I have a couple concerns about the news. First, doesn't the fact that central banks, who usually have different objectives, are combining forces mean that the problem is worse than we thought? Second, increased open market activity by the banks will increase volatility. I don't think we have an account killer event on the horizon but I still maintain that risk levels are high not lower in the forex based on the news today.

In addition to this discussion, I will take a few minutes in the daily video to walk through the new pairs pages we released on our site yesterday. Take a look and tell us what you think.

To see the video, click here: http://www.pfxglobal.com
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I don't have the full info on this yet, but it was announced that a co-ordinated liquidity injection among the Fed, BoE, ECB, BoC and SNB is underway. I'll follow up on this later but there has been a strong positive reaction in the S&P futures, which have already been moving up in the overnight session. That means the equity/carry trade markets look good to go for today as well.

The rise in the S&P futures caused the appreciation in the carry trade pairs. I'll follow up on this a bit later as more info comes out.

Why not try taking advantage of the overnight movement in futures and carry trades with me and the other members of my room. It's still just ten bucks a week. I don't have fancy charts, websites etc, just some fun trading. Join on my blog: the newstraderfx.blogspot.com or contact newstraderfx@yahoo.com