Ok, I know that talking about the Japanese Yen isn’t at the top of credit option traders’ minds, but I’ll keep it brief and tell you why I think the Yen Carry Trade concept will ultimately lead to a second half of trading that pushes the tech sector higher.

Don’t worry, you don’t need to be a currency expert to understand why I think this concept will push asset classes higher into the close of the year.

When raising cash in the U.S. gets expensive, one way to stretch your investing dollars is to borrow money in another country’s currency that offers cheaper interest rates. Hedge funds have been doing this for years – borrowing Japanese Yen, taking the money back to the U.S. equity markets, and buying up shares of the infamous FANG stocks, or whatever acronym we’re using now to talk about stocks like Adobe, Nvidia, Google, Facebook, Microsoft, and so on.

The concept is simple – borrow currency where it is cheap, buy stocks that are likely to move higher, and then pay back your loans with the gains.

What hurts this concept is volatility in currencies and if the dollar falls, much as it did in late 2022. However, the longer-term trend is showing the Dollar gaining strength.

You can see from this chart, comparing the U.S. Dollar to the Japanese Yen, that there’s been a pullback since July, but we will see the Yen Carry Trade keep going if the currency pair can bounce off the 50-day moving average and keep moving higher.  In fact, this could be the start of another move higher in U.S. equities.  

What has been the best-performing sector that would help pay back currency loans the fastest?

Tech stocks.

I don’t think the Nasdaq will finish the second half of the year as strong as it did the first half, but I think there’s still some juice left to squeeze, especially if earning season goes the way of the bulls.

You can also look to see if traders are accepting risk by following the Russell 2000 (IWM). The ticker has been stuck in a trading range since November of last year, with a quick false breakout in February.  Will the third time be a charm and finally break higher?  Conversely, the market will retreat back to safety if IWM fails at a triple top.

Today’s trade idea is using ON Semiconductor (ON) and it’s a simple credit spread.  Going out to the 18th of August for an expiration, we can sell the $90 put while simultaneously buying the $85 put for a net credit of somewhere between 1.18 and 1.26.  Since this is a $5-wide spread, that would give us the potential of over 20% return on risked capital.

I usually like selling credit spreads on down days, and I acknowledge ON did finish higher by over 2% yesterday. While this isn’t the perfect setup, I do like selling options under swing lows, which in this case is around $90. That also happens to be the lowest low of the last three days.

My profit target is 50% of the credit received.

I don’t trade with stop losses on credit spreads. If anything, I’d look to exit the trade if the current price crosses below the sold strike ($90) or if the current price crosses below the nice uptrend line that I drew on the chart below. That would indicate that this trade setup is over.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab