“The Echo Crash: Turn $5,000 Into $97,700 …” (Macro Trader)

by Travis Johnson, Stock Gumshoe | November 11, 2010 2:00 pm

Justice Litle's "Crash the Pound" teaser pick

This tease is itself an echo of a past teaser, though the echo got a bit garbled in the transmission — a bit over a year ago Justice Litle sent around a teaser for his Macro Trader[1] newsletter telling us that a cabal of traders were about to “crash the euro[2],” and that he had a way for you to profit from that crash.

You can see that older article of mine on that “crash the euro” prediction here[3] if you like — I decided that he must be recommending a particular put option on an ETF to profit from the euro’s fall, and while the euro did fall during that period it’s uncertain whether the trade would have been profitable, the option didn’t end up “in the money” but the price certainly fluctuated enough that some traders could easily have sold higher than they bought.

In the teaser Roseman takes credit for giving subscribers potential returns of 233% on this idea as the euro crashed further into May with the Greek crisis … though his original teaser letter on this that I covered was far earlier than that, back in September, and he was at the time promising a euro crash by October of 2009 — so I gave him the benefit of the doubt and surmised that he’d be more conservative and bet on a January options[4] expiration to give more time for the “crash”. That’s obviously several months before the “real” crash this past Spring, which he says he pounded the table for, so perhaps he continued to make this bet until it was right (that’s the hard thing about options — being right on the fundamentals isn’t enough, you also have to be right at estimating when the market will reflect the fundamentals that you see).

But anyway, whether that trade turned out well for his subscribers or not (I’m just working from what he teases, I can’t know exactly what he says in the newsletter), he was right about the euro falling eventually … so what is it that he’s pushing this time?

The Pound. That’s right, the source of this “crash a currency” idea was George Soros[5]’ very famous billion-dollar profit when he became “The Man Who Broke the Bank of England” during “Black Wednesday” (the culmination of the September, 1992 UK currency crisis), and now Litle thinks Soros and his ilk will be returning to the scene of that profit and causing the Pound to crash again … and you can go along for the ride.

Of course, he makes it seem very mysterious and time sensitive:

“URGENT: The First 1,000 People Who Respond to This Critical Briefing Will Receive a FREE 18-Key Authorization Code That Could Multiply in Value by 1,854% in the Next 60 Days…”

and

“The Black Wednesday Billionaires are setting up for another major score. I believe this will be their most profitable “job” to date… and I expect them to pull the trigger in the next eight weeks.

“The best part is that I’ve found a proven way for you to ride shotgun.

“But instead of making 1 dollar for every 10, I’ll show you how you could safely and easily multiply your winnings… and turn every $1,000 you invest into as much as $3,000… $5,000… even $19,540!

“If my target is reached, a $5,000 investment could turn into $97,700 virtually overnight!

“And remember, you don’t have to trade currencies or buy anything in the foreign market to take part. All you have to do is give your broker the free 18-Key Authorization Code I’m prepared to hand you.”

This time, though, Litle says that the government will be cooperating with the speculators to crush the value of their currency, all part of the global rush to currency devaluation:

“Is the British Government About to Push the Pound Over the Edge?

“In 1992, the Bank of England and the British government spent billions of their reserves trying to support the value of the pound. This time, they will be working with the speculators to drive the pound lower.

“Why would they want their currency to be LESS valuable?

“According to the Bank of England, the U.K. is right back on the verge of recession. And there’s a good chance we are heading into a new global slowdown.

“In this climate, one of the only ways to achieve economic growth is to be among the cheapest suppliers of goods. And the way to do that is to have a weak currency.”

So, plenty of assumptions and question marks in there — but still, we get the idea, Litle thinks that the UK’s currency is going down. How do we profit with that? Basically, we bet that the dollar will become more valuable against the Pound — here’s some of Litle’s rationale:

“I believe they plan to strike when a violent reversal hits the currency markets. You will know the raid is on when you see a surge in the U.S. dollar.

“And the timing is perfect for it to begin at any moment…

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“According to data from the Commodity Futures Trading Commission investors are more bearish against the dollar than at any time in history! And when too many investors pile into one side of a trade, the rubber band is due to snap back.

“In fact, based on historical research performed by Credit Suisse, whenever investors have become this overwhelmingly bearish against the dollar, it has mounted a rally 100% of the time on a three-month basis….

“Let me be very clear: In the long run, the dollar is doomed. No question about it. But at the moment, the U.S. dollar is the most liquid market on the planet. Like it or not, it is still the world’s No. 1 safe haven.”

And he thinks that two possible catalysts in the next two months are a “downturn in U.S. markets” or “Act II” of the debt crisis in Europe causing more of that “flight to safety” that we saw in past years. Like many people, he clearly thinks that we’re going to have another economic downturn and/or recession, and that we’re definitely not out of the woods.

So what, then, is his “free 18-Key Authorization Code” to profit from the fall of the Pound over, if he’s right, the next 60 days or so?

Well, the last time I wrote about a tease like this from Litle, for that bet against the euro, it was a simple option trade — and back then he teased it as a 5-letter code, which is how options were denoted back then. That changed to simplify the options “ticker” system, and whaddya know: options now use 18 digit alphanumeric codes that incorporate the underlying ticker, the strike price, and the expiration date.

So yes, this is another options trade — and I’d bet my hat (it’s not that nice a hat, just to warn you) that this is a put option on the CurrencyShares British Pound[6] Sterling Trust ETF (FXB), which is the easiest way for stock market investors to get direct exposure to the Pound.

Buying a put option means that you have the right to sell a stock (or ETF, in this case) at a set price before the expiration date. If you’re speculating that a stock (or ETF) will fall substantially, you can buy an “out of the money” for relatively little money and hope that the underlying security falls past your strike price to put you “in the money” and allow you to reap a nice leveraged gain. Of course, if the underlying ETF, in this case, doesn’t fall the put option would expire worthless (unless you sold it at a loss before expiration), and since options have a set expiration date they also see their value decay as each day passes and there’s less time left for you to be “right” (all else being equal).

So with that as our basic backdrop, which put option would you buy against this CurrencyShares ETF in order to bet that the Pound will take a hit soon?

Well, the FXB ETF has options expirations available in November (meaning, next week), December (also not within 60 days), March, and June. So if we want to give Litle his 60 days to be right on this one but not go too far out in time so we have to pay more for the option, that would lead us to March.

Litle didn’t say much in the teaser about exactly how far he thought the Pound would crash — except to include this opinion from John Mauldin[7]:

“John Mauldin, an advisor to hedge funds[8], is another expert who believes the British will try to solve their economic problems by weakening the currency. In fact, he stated that he believes the pound could fall by a third against the dollar!

“If that were to happen — and I believe there is a good chance of it — your Authorization Code could increase in value by as much as 1,854%… enough to turn every $5,000 into $97,700!

“If it falls by only half that much, you could still turn a $5,000 stake into $40,650.”

So, the FXB ETF roughly tracks what 100 pounds would be worth in dollars — and it takes roughly $1.60 to buy 1 GBP right now, so the ETF is right around $160. If it were to fall by a third, that would put it at about $107, an absolutely catastrophic collapse (particularly if it happens in just a few months), and far more than the Euro fell earlier this year.

So how does a move from $160 to $105 create a gain of 1,854%? Well, I can’t make the numbers work exactly for any of the current prices of the options, but here’s one example in that ballpark that seems the most likely to me:

These are all pretty low-volume options, so I’d guess that if there’s a newsletter recommending a specific option contract then that would be among the more active and higher “open interest” put contracts available. In the case of the March expiration, that would be the $150 strike price, which has the “key code” of FXB110319P00150000. It trades at $1.50 right now, so if it went up by 1854% that would put it at just under $30, which would imply that the price of the underlying ETF had fallen to somewhere near $120, a drop of about 25%. Getting to $105 would mean that your option should be worth about $45 at expiration, which would be a more impressive gain (though it could just be that Litle has some padding in there if he assumes that option goes up in the weeks after his copywriter writes the tease — if you had to pay $2 for the contract, for example, you’d be right around $40 with an 1854% gain.

So that relatively close match for the possible percentage gains in the teaser, and the fact that this put option has 10X the open interest of other put options at the March expiration, leads me to think that this is likely the trade being teased by Macro Trader right now. There are lots of ways to play currencies off one another, of course, but if you’re writing to an audience of folks who mostly invest in U.S. stocks it’s hard to find a clearer speculation than the options on the FXB ETF.

Will it be profitable? Well, the G-20 is clearly trying to put the kibosh on what is emerging as a global currency war, so if they do anything to stabilize exchange rates that might impact how these currencies move against one another, and, of course, Litle could be plain wrong about the continuing appeal of the dollar as a safe haven (at least in the short term), or about the collapse of the pound versus the dollar (remember, currency trading is always relative — for FXB to fall the Dollar has to rise against the Pound — if they’re both falling, the Pound has to fall further).

If you’ve got an opinion on where these competitive currency devaluations will end up over the next few months, and whether or not you think the Pound will collapse relative to the dollar, well, I’m sure we’d all be happy to hear it — you’ve got at least as much chance of being right as I do, which is why I’ll let you form that opinion on your own. And share it, of course, in the friendly little comment box below.

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