Unless you have been in a different planet, you know that the Dollar has declined in value against all major currencies in the world, even against the Israeli currency known as NIS (New Israeli Shekel). In January alone, the Dollar has declined about 7% in value against the Shekel. What followed after such a dramatic was the constant whining of money managers of how speculators have taken over the Israeli market and are doing as they wish. I would dare to speculate that the whiners have been on the loser side and have not hedged themselves against the rally down. It is always easier to blame some unknown cause at your loses than to admit that the only reason you did not hedge against such a decline was because you thought “Hey, it is so low now it certainly can’t get any lower!!”
Having examined the volume traded in the option market on the dollar/shekel, it was evident that the volume has more than doubled. What was more interesting is that more out of the money calls were been bought than out of the money puts. The distribution in normal times is usually 70% for out of the money calls and 30% for out of the money puts. In January it was about 85/15. One of the reasons in my opinion to such a result is due to the fact the as the Dollar started to decline, money managers (such as those who blame speculators) started buying out of the money calls thinking the Dollar would surely soon rally up. This has not happened though.
Conclusions
What can we conclude from this? Firstly, we can conclude that most experts don’t know what they are doing that’s for sure. The 7% fall in one month was not expected. A better way to react was to be more adaptive and not assume because you have not seen such low levels of the Dollar in 10 years that it can’t be happening and it should rise in value! That argument never works.
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