When implied volatilities get really cheap in a reverting product like currency, the market is almost begging traders to buy puts, says Mark Sebastian of OptionPit.com.

I am not a big player in the FX market, however, I do watch the currency trust options semi-regularly. For those that have not been following the trade between the US dollar and the euro, the climb the euro has had against the dollar has been astounding. I would have thought the dollar would have gotten stronger against the euro with taper talk and stimulus out of Europe. But, take a look at the chart:

chart
LivevolX® www.livevol.com
Click to Enlarge

At the same time, 60-day IV is pretty cheap in the FXE at around 7%. When IV's get really cheap in a reverting product like currency, the market is almost begging traders to buy puts. I think that course makes some sense now.

The Trade
We like buying medium term puts in FXE. We are looking at Feb or March options as values right now somewhere near the money. We think a quick trip back below 134 is certainly in the cards.

By Mark Sebastian, Blogger and Contributor, OptionPit.com