by Michael Shulman | June 13, 2012 12:26 pm
The Greek elections are this Sunday, but regardless of the outcome, there is no way to fix Greece — and this means market volatility will rise sometime in the future and stay up there for a while.
Greece is leaving the euro, either in a hurry or next year. No matter how much lipstick they put on the pig that is the eurozone, a country that does not export anything with high value-added content, views jobs as a property right and believes contracts are sacred only to those dumb enough to believe so cannot stay aligned with currencies of countries such as Germany — or France or Spain for that matter. And while the market may trade up if the pro-bailout politicians win this weekend, the exit from the euro is inevitable for Greece — and probably Portugal as well.
So what does this mean for traders looking to generate income during potentially turbulent times?
Trade the turbulence via the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) — the ETF for the VIX, otherwise known as “the fear index.”
Check the charts — you can’t find the VXX trading below $15. It’s currently around $20. Six months ago, it was at $43, and a year ago it was at $49. It’s a sucker trade. So, how do you trade it? Sell puts.
Sell the June $19 puts for around $0.40 per share or $40 per contract — in effect, a weekly option). The VXX has weekly options, but the third week of every month is option expiration week, meaning all options are “weeklies.”
You could also sell a July $15 put and get around 3.5% return on capital or an annualized rate of 42%. If you sell an August $15 put, you have a 5% return on capital, an annualized rate of 30%.
Or further out you can sell a January 2013 $15 put for a 17% return on capital or an annualized rate of 29%.
What are you waiting for? The only risk involved here is that the market goes up 20% and stays steady or climbs for a long time. But do you really think that is going to happen?
Michael Shulman is editor of Options Income Blue Print. Learn more about trading weekly options in this free short video.
Source URL: http://investorplace.com/2012/06/use-vxx-put-options-to-cash-in-on-the-greek-elections/
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