By: Andrew Keene
Investor uncertainty over the U.S. presidential election has been calmed; Barack Obama will serve a second term in the White House. With that question answered, investors now face the prospect of falling off the ‘fiscal cliff.’ The cliff is a bundle of spending cuts and tax increases that amount to over $600 billion. The strain that these spending cuts and tax increase will put on the economy is potentially severe. Should Congress fail to act the U.S. economy may fall off this cliff. Uncertainty over the situation weighs heavily on the market with wider indices trading much lower today.
With market volatility expected to be extremely high between now and years end, investors may look for safe havens. The USD has long been a safe haven for investors. In times of high volatility and uncertainty investors will flock to these historically safe assets. Few investors believe that Congress will be able to come up with a lasting solution to this problem. Fear and uncertainty in the market is a bullish scenario for the USD. Since UUP is the dollar bullish fund, I would like to make a play on this fear using this fund.
My trade: Buy the UUP Jan 22 Calls for $0.32
My Risk: $32 per one lot
My Reward: Unlimited
My break even: $22.32
I like this trade because of the “flight to quality” when the market is weak. The dollar is still a safe haven for investors.