Wednesday, February 10, 2010

Greece: Straddles to Profit From the Collapse of the Euro

Analyst John Mauldin reported on Greece and the Euro, basically portraying a no-way out situation, one where the options are to kick Greece out, a default, or other equally devastating exits.

One where the Euro would collapse.

"What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it's one thing to save your domestic banking system ... but why save Greece?)."

"If Greece is bailed out, Portugal and Ireland will ask "Why not us?" And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out?"

The Euro has taken a bad beating lately, whether it recovers or collapses, straddles allow an investor to profit either way.

Here are February and March straddles (strangles) for the popular FXE ETF that tracks the Euro:

Many thanks to 'Crash' for pointing out an error on the Feb options. Straddles have been updated with prices as of 9:35AM.

Computed with StraddlesCalc tool, which shows the maximum moves needed to achieve profitability.

This is not advice. Options are dangerous and may cause 100% loss. Please do you own due diligence.

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Crash said...

Hi There,

I think the February upside/downside percentage moves are incorrect.

The March ones look OK (I checked the downside and it's bang on).

The Shocked Investor said...

Thank you very much Crash. Indeed, not sure what happened. I have updated with today's prices.

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