MODIFIED COT STRATEGY

Students of my FXOptions classes know the power of Commitment of Traders, some even swearing by it, and laughing all the way to the bank! The returns on COT trades are staggering, as proven by real trading records from our students and even trading scenarios on PFX. But COT trading has its disadvantages in running large drawdowns in your account. This could be OK under normal circumstances but what if VIX is above 30 and is going up, like the current scenario? A high VIX is bad, and could lead to "abnormal" drawdowns which could cause YOU TO CAPITULATE INSTEAD! So how do we take advantage of the COT on the USDJPY when VIX is high?

Use a modified COT strategy which limits your losses on each lot. You can start buying USDJPY at the spot market, and keep on buying as it falls by 100pips. For each lot of USDJPY, you should buy 1 Protective Put Option (you can do this on ThinkorSwim or Saxobank) which expires this Friday (Options Expiration, although you can go longer on Saxobank). Even as the USDJPY goes against you, the effect of the Put Option is to limit your max loss to the cost of the Put. (This is a weird strategy because YOU WANT USDJPY to GO DOWN, DOWN, DOWN....). Once capitulation occurs, you should buy back the puts, which should have some time value left. This will allow you take advantage of the move up without suffering massive drawdowns. The drawing belows depicts this in graphical form.

For a more in depth tutorial on Protective Options, go to this link at PFX Global.

Happy Options Expiration!

Chief Shook