Bullish Case: The UDN may see a bullish trend as implied volatility suggests increased uncertainty ahead, indicating potential upward movement. Historical data demonstrates mean reversion, often leading to price recoveries in similar past conditions. Low term structure volatility also supports an uptick in prices as market sentiment shifts.

Bearish Case: With UDN’s ongoing historical decline and current high implied volatility suggesting increased risk, we may expect further bearish pressure. A repeat of past trends indicates that the overall strength of the USD and increased economic stability could further suppress UDN prices in the short to medium term.

Potential Outcomes:

1. 40% chance of a minor upswing driven by mean reversion;

2. 30% chance of stable prices due to balance in market sentiment;

3. 30% chance of continued decline, fueled by USD strength and historical trends;

4. Implied volatility spikes in response to market events.

Trading Oracle: Adopt a long volatility approach with a debit spread targeting UDN calls at $19.00 expiring in January 2025. This strategy capitalizes on the low current implied volatilities while anticipating price recovery, maximizing profitability with limited risk exposure if UDN moves upwards. Aim for small cap positions given the overall mixed sentiment.

November 14, 2024