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How to Make Double-Digit Returns on the Recovery No One Believes In

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Many refuse to believe in the economic recovery that has been taking place in the United States for the past four years, because it is the result of the Federal Reserve "artificially stimulating" the economy.

But the reality is we have entered a new age where recoveries and commerce are heavily influenced by central bank intervention. And from this perspective, the United States is currently the best of the worst.

Sure the Fed continues to print money and buy billions of dollars' worth of Treasury and mortgage-backed securities each month. But with growth in developed nations generally anemic and several countries teetering on the brink of recession, central banks around the world are taking extreme measures to stimulate their economies.

The European Central Bank has reduced its key lending rate to 0.15% and set a negative rate on bank deposits parked overnight for the first time. Japan approved a massive stimulus package. China and Korea are printing money and pumping it into their respective economies. Sweden's central bank announced an unexpected 50-basis-point rate cut. The list goes on and on.

When a government or economy struggles, its currency follows suit. Unlike gold, silver and other commodities, fiat currencies need to be compared to something in order to determine their value. Because every U.S. dollar ( USD ) printed is simply a rectangle of cotton fiber paper, its actual value is nil. The only thing that (arguably) makes it worth anything is the simple phrase "backed by the U.S. government," just as the euro is supported by the euro zone nations and the ruble by Russia.

While the U.S. economy is certainly not booming, the recovery is seemingly stable. And the USD is developing into a very interesting proposition given its company.

As the Fed continues to taper its bond purchases, and eventually raises interest rates, the dollar should get a big boost. And there is plenty of room to go before the greenback gets back to a respectable level.

Several USD indices and ETFs are already beginning to show signs of life and break out of stagnant patterns, so right now may be the perfect time to buy.

The PowerShares DB US Dollar Bullish ETF (NYSE: UUP ) tracks the value of the USD versus six other major currencies including the euro, yen and pound.

For the first time in 12 months, UUP has moved back above its 200-day moving average ( MA ). Additionally, it is close to seeing the 50-day MA cross back above the 200-day. Both events are very bullish for the longer term.

UUP Chart

There is some resistance at $21.85, but after that it's mostly clear sailing up to the $22.20 area.

UUP Call Option Trade

Today, I am interested in buying UUP Mar 21 Calls for a limit price of $0.87.

UUP Call Option

This has a of 80, which means it will move roughly $0.80 for every dollar that UUP moves, but it costs a fraction of the price of the stock.

Risk graph courtesy of tradeMONSTER.

This call option has a delta of 80, which means it will move roughly $0.80 for every dollar that UUP moves, but it costs a fraction of the price of the stock.

The trade breaks even at $21.87 ($21 strike price plus $0.87 options premium ), which is less than 1% above current prices.

Our upside target for UUP will be $22.17, at which point our call option will be worth at least $1.17, resulting in a 34% profit. Once you enter the trade, place a good-til-cancelled (GTC) order to sell at $1.17.

The nice thing about trading UUP is its low volatility and cheap options. One contract will cost you less than $100. Even though the actual dollar amount we stand to make on our call options seems low, the percentage return is high. The key will be to buy enough contracts to make the trade worthwhile without overexposing yourself.

Recommended Trade Setup:

-- Enter a limit order to buy UUP Mar 21 Calls at $0.87

-- Set stop-loss at $0.55

-- Set price target at $1.17 for a potential 34% gain in 3-6 months

If you have a question or comment about today's strategy, please send it to editors@profitabletrading.com .

P.S. In the past year, my colleague Amber Hestla has made 52 trades... and they've all been winners. Income Trader readers who've followed Amber's advice have received annualized gains of up to 212% -- now it's your turn. Discover how you can take advantage of this opportunity -- and easily multiple your Instant Income -- by clicking here .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2016 StreetAuthority, LLC. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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