After the Month in a Decade, Option Traders are Looking for a Major Reversal in the Dollar

After posting the worst monthly performance in a decade, the U.S. dollar has been able to hold its ground. The value of the dollar is typically determined by the exchange rates of the world’s major currencies. The U.S. Dollar Index is one measure that investors typically use to represent the dollar’s performance. Investing I the dollar index can be done through the Invesco DB Dollar Index Bullish Fund (NYSEARCA: UUP) and on Monday, it was the options market on that ETF that exploded.

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  • The U.S. Dollar Index is weighted primarily to the Euro currency. At a weighting of approximately 57%, the movement in the EUR/USD exchange rate is the biggest contributor followed by the Japanese Yen with a 13.6% weighting. During the month of July, the dollar fell against virtually all major currencies and gold.

    When price reaches an extreme oversold position, at some point the buyers start to wade back into the bullish waters and buy the asset. In this case, UUP has been holding the $25 area of support. On Monday, the options market got involved with call option volume that was over 60% higher than average. The call option volume was mostly long trades with over 65% of the volume getting filled at the ask price. There was one trade filled in one print for 5,000 contracts on the 28 AUG 20 $26 call option. That contract finished with over 23,000 contracts traded against 2,067 open interest. At a cost of around $0.03, the notional value isn’t extremely high, but the indication is for a large expected move.

    Action to Take: The near-term expectation in the coming weeks is for the price to retest the June highs near $26.50.

    Option traders may want to consider the 18 DEC 20 $26 call option for around $0.30. Consider rolling to a higher strike price if the option double in price.

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