I’ve taught all day, and my noodle is cooked. So if you were preparing for a philosophical tale full of deep-seated thoughts, prepare for mild disappointment. Instead, I’m shooting straight with a useful look back at how I played the failed Euro rally last month like a straight-up fiddle.

Of course, for a simpleton like me the vehicle of choice for Euro speculation is the Guggenheim CurrencyShares Euro Trust (FXE). She’s liquid, expensive, and volatile enough to build option trades around. Unlike its puny counterpart UUP which is harder to hammer than a twisted nail.

In late-April, FXE took a nosedive from $119 to $111 with one brief retracement along the way. Since I didn’t catch the initial impulse move, I was licking my chops waiting for a bite. Not wanting to short into the abyss, I sat like a good little trader on the sidelines, waiting for the stock to come to me.

On June 4th, I reasoned it had bounced enough to justify wading into the waters with some bearish exposure. As is often the case, my weapon of choice was a bear call spread. The higher implied volatility rank (57%) coupled with my desire to build a positive theta, high probability position supported that particular strategy. I sold the July $114/$117 call vertical garnering 41 cents, or a 15.8% potential return.

Knowing that I am often early – or that the stock usually moves adversely at some point during the trade, I elected to scale-in by entering 1/3 of my desired size. The plan was to open another 1/3 if FXE rose far enough to increase the call spread value to 62 cents or roughly 1.5x the initial premium received.

Turns out using the scaling technique paid dividends (it usually does). By June 6th, FXE had risen two more days lifting the call spread to 62 cents in the process. At that point, my second order filled.

Tier 1: July $114/$117 bear call @ 41 cents, target 5 cents.

Tier 2: July $114/$117 bear call @ 62 cents, target 26 cents.

I still had one more shot to pick the top of the retracement. It was a rebound that even at that point I still believed was born to die. The plan was to wait on my third tranche until the spread lifted to at least 82 cents.

It never did.

FXE finally gave up the ghost, succumbing to gravity and by June 14th I had hit my first target of 26 cents. That locked-in a gain of 36 cents or a 15% on my second tier.

I’ve yet to exit the first tier but with the bear call now dwindled to 10 cents she’s getting awfully close.

Here are a few key lessons that were reinforced by my Euro-bashing adventure.

One: Retracements after impulse moves have a high chance of failing.

Two: Scaling-in equals chef’s kiss.

Three: If you like the idea of getting shorter at higher prices then learn how to embrace the awesomeness that is short gamma. If you can avoid the occasional back-stab, then he’s downright gentlemanly.

Enjoy the 4th and remember:  Protect Your Digits.

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