USD - The Contrarian Trade.
There are many reasons to be short Dollars today. With so much money printing in the US, it is hard to find someone that doesn't think the USD will lose a lot of its value in the coming years.
However, this is also the most crowded trade today, as most traders are shorting the USD. Is Europe in a better shape than US ? Well this has nothing to do with this trade. The only things that matter is what is the R:R in case the ship will tilt in the other way.
Looking at the monthly chart we can see that the EUR/USD pair had reach the 2018 top. If that will become a resistance we can see the USD strengthening and many stop orders being hit.
That could lead to a move down to the 1.1 levels.
In the daily chart, the price action entered the winter, and there was higher probability to go down to the 200d ma, or even the 1.165 support level.
So, how can we trade such an idea, with good R:R and not risking a lot while going against the crowd.
We could buy a 1.5 months future put options that will give us the right to be short the ERU/USD futures at 1.2.
Each future has a multiplier of 125000. Thus buying 10 puts is like having the right to sell 1,250,000 at 1.2. The cost for each put was only 0.004 (*125000 = 500$).
And now as the market begins to go down the options are almost ATM and I still have a full month until expiration.
If the market will break down, we can see many stop orders accelerating the move, and also the implied volatility is likely to go up.
To sum up, when other financial instruments are trading at ridiculous high vols, we can find other instruments where the vol is low and risk a small amount with a potential for big reward if the crowd will be heading for the door.