EliteEServices, 2012
This article will explore the various technical methods to trade a potential collapse of the EU, it will not recommend any specific course of action.
US Stocks that do business in Europe
How is it that European news is causing US stock markets to drop?
Many US issues generate a large percentage of their revenue from the Eurozone. A decline in the European economy would mean a decline in their revenue. A complete collapse of the European economy could mean a significant disruption in that part of their business.McDonald’s being a good example, in a recent earnings release; McDonald’s blamed problems in Europe for sluggish numbers.
A big drop in the European economy could put a dent in McDonald’s earnings, and thus cause the stock to drop. The problem with this strategy is that investors may not see an immediate correlation, thus, it may take weeks or months for it to play out. For example,it would be unlikely that as bad news about Europe is announced, McDonald’s stock is dropping. So this strategy should be researched carefully.
Euro Options Available through most major clearing houses, options on Euro futures provide a good way to bet on a Euro collapse with controlled risk. Options are the right but not the obligation to buy or sell the underlying contract.Warning to new options traders! Do NOT short options! It is possible to buy a put or a call, so it is possible to bet that the Euro will go up OR down, without shorting options. Shorting options is for investors who already have the underlying instrument and want to generate premiums from it.If you want to bet that the Eurozone will not succeed with their debt restructuring, you may want to purchase an option ladder. This would be done by purchasing 5 long puts at 5 prices. The exact prices will change based on market demand, but your broker should provide some information as to the most significant strike prices, such as 1.25, 1.24, 1.2350, 1.22, 1.21. The good thing about this strategy is when you purchase the options you know how much you are going to pay for them up front. If you are wrong, you have the known investment in the strategy (the cost of the option) which can be modified according to how much you want to invest in the strategy.
Bond futures
Euro-bund German Government – Sep 2012 The chart shows the premium of a futures contract representing German government bonds, the German equivalent of a US Treasury Bond.March levels were 136, as of this writing(6/3/2012) the price is 145. This would have been the equivalent of a 7% return in 2 months, using no leverage. Why are investor swilling to pay such a premium for a Government bond? With so much fear in the Eurozone, it is one of the only local perceived ‘safe havens’. Also, money is flowing into Germany from less stable states such as Greece and Italy. Of course, this contract is denominated in Euros, so the safety is a lot of perception, as a collapse in the Euro would wipe out all Euro denominated value. However, in the short run, if you are a short term trader, it would have been possible to make 7% in 2 months trading this contract with no leverage.Looking at the discrepancies of the varying interest rates shows how Europeans gauge the stability of the government, for example a German bond will pay 4% whereas an Italian bond will pay 8% or more. This is known as the‘spread’ and many institutional platforms such as Bloomberg will allow you to trade these instruments. Aside from that, we can use them to determine market sentiment. These are a few ways to trade the collapse of the Euro. Be advised: If the Euro collapse accelerates, we can expect extreme volatility so it is a strategy that should be monitored closely.
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