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Weather the Cyprus Bank Storm with Options

Sit tight, or wait for the storm to pass with silver and gold options plays


Did you ever think the first thing you wanted to read about – concerning your portfolio, your open positions, your travel plans, your mortgage – was Cyprus?  If you say yes, I hope your nose doesn’t grow too big. Yup, the financial powerhouse, Cyprus, is in the news and rattling markets. Why not? It has been calm for too long.

What exactly is going on? Let’s start with my conclusions – the Germans, once again, have shown their financial illiteracy and their extraordinary heavy-handedness (which, as of this morning, was part of the Wikipedia definition of the German national character) and insisted bank depositors – not bond holders – take a 6.75% to 10% haircut on their deposits as part of an EU rescue package for Cypriot banks. That means Joe the plumber – not the guy from the McCain campaign, his brother – wakes up and his savings are worth 6.75% less, or if he is a really good plumber, 10% less than they were on Friday. The announcement of this agreement, not yet approved by the Cyrpiot Parliament, did the obvious – it sparked a bank run and banks and ATMs ran out of cash and the banks are closed today and probably tomorrow. Way to go Angela and your surrogate, whatshisname Schauble, the German representative cramming this and other idiocies down the throats of various countries with warm, fond memories of the German conquest and occupation in World War Two.

Oh yes, these memories matter – big time. They are behind a great deal of the resentment of the EU bailout packages in Greece – more casualties per capita than any country during World War Two – and a lot of pother places as well.

Back to your money – what could happen?

  • The Cypriot Parliament says “nyet” – an appropriate choice of words since one of the reasons Cypriot banks got in trouble was their acceptance of huge amounts of Russian cash that left – but the bad loans the banks made stayed behind. If they say nyet, theoretically the Cypriot banks collapse, perhaps the Cypriot national central bank and there is a run on banks in other Mediterranean countries.
  • The Cypriot Parliament says yes – in some form – and when the banks open there is some civil unrest – and there is a bank run in other Mediterranean countries.
  • The EU backs down and changes the terms. Banks in Mediterranean countries are now seen as very safe and their stocks get a big boost, pushing European markets and probably the US market higher.

Real clear, huh?

My point? The program will probably go through. Gotta keep the Germans happy; they have all the cash everyone needs, from selling centrifuges to Iran and building Saddam’s bunkers – no kidding, they did. Depositors are going to pull funds from their banks in Italy, Greece, Portugal and Spain and put that money in banks in other euro denominated countries. Not a good thing.

Your money? Don’t do anything for a couple of days unless you are looking for a day trade that can still pan out if it does not work this week. I would sell puts on the iShares Silver ETF (NYSE:SLV) at the $27 strike and on the  iShares Gold ETF (NYSE:GLD) at $150. Pick your strike date – and remember there will be mini-options on the GLD beginning today, you can sell puts that represent only 10 shares, not 100.

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