Here we will look at a long term option trade in the British Pound against the US Dollar and how you can trade it for a huge gain, from the point of the fundamentals and technical picture...

At the moment the dollar is strong against the Pound - but in the coming months a cheaper US$ is inevitable, to restore the global imbalances reflected in America's huge current account deficit but this will not become a factor, until we see an improvement in the global economy and were not there just yet.

So when will this happen?

The answer is we don't know exactly but sometime between now and mid year when it does occur, the Pound will be one of the main currencies to benefit. At present the smart money is buying the Pound.

If you look at the CFTC Net traders positions on currency future positions, you will see the commercial traders (The big boy hedgers who know value) are buying and are building a long position. On the other hand, the speculators (who always lose at big trend changes) have a huge net short position.

The commercials are long the Pound with over 56,000 contracts long and just 15,000 short of course specs are over 40,000 short and just over 7,000m long. The smart money is accumulating the dips showing the Pound is fair value at current levels. Were with the commercials and this one and sooner or later the Pound is going up fast. If you don't know how to use Net Traders, as they allow you to see what the best traders are doing and it's free.

So how do we trade the Pound?

Simple, we see the Pound as a buy above the 1.40 area and you don't need to be to be to accurate buying exact levels, as we are going to use September call options. If you don't know about options check them out, there a great risk control tool which gives you limited risk and unlimited rewards.

So long as the price trades above our strike by expiry the option will make money. So we don't have to clever and get exact pinpoint timing and short term price spikes, cant stop us out as the option gives us limited risk.

How Far Could the Pound go?

We see it trading by the time the option expires to around the 1.60 level or higher which will yield a great profit if it occurs.