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An ETF for This Week’s Greek Drama

Hedge the Euro decline with an option trade


IVolatility is a leading provider of options data, analysis tools and best-in-class volatility charts.

A strategy idea for options trading investors.

Western theater originated in Athens and its drama has had a significant impact on Western culture as a whole, according to Wikipedia. With the exception of a few odd takeovers, last week’s financial news was all about the theater going on in Europe and assessing the probability of a Greek debt default. The markets seem to think it will be manageable. But what if they are being too optimistic? From a risk management perspective, we think some additional hedging is in order.

Euro Currency Hedge

Since the Greek debt issue has yet to be resolved, perhaps it is time to consider a currency hedge strategy. Here is one idea:

ProShares UltraShort Euro, (NYSE: EUO), 17.25. The exchange-trade fund seeks to provide daily moves corresponding to twice (200%) the inverse (opposite) of the daily change in the U.S. dollar price of the euro. The fund invests in swap agreements, futures contracts, forward contracts, option contracts.

EUO’s current Historical Volatility is 25.80, with an Implied Volatility Index Mean of 32.35, up from 27.68 last week, for an IV/HV ratio of 1.25, and a very bullish .3 put-call ratio (bearish for the euro).

Friday’s option volume at 6,663 contracts compared to the 5-day average of 5,380 makes the options fairly thin especially in the deferred month contracts, so there may be some advantage in legging into the position.

B/S Qty O/C USym Exp Strike P/C Price IV
B 1 O EUO Nov 18 C 1.08 30.89
S 2 O EUO Nov 20 C .68 35.39
Dr .40

With a good volatility edge, the debit is a favorable 20% of the distance between the strike prices providing an attractive 4:1 risk to reward ratio. Use a close back below the last pivot just under 16.50 as the SU (stop/unwind).

This options idea from is based upon Friday’s closing prices. Check the option chain of the underlying for the latest prices.

Visit IVolatility for more trading ideas and volatility charts.

Article printed from InvestorPlace Media,

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