Use Options to Trade the Mess in Europe

by Michael Shulman | August 17, 2011 11:12 am

Is there a way to profit from the nonsense – actually, it is very serious nonsense – that is now the European debt crisis?

Yes, if you are a short-term trader willing to speculate.

Yes , if you are a short-term income trader.

Yes, if you are a longer-term swing trader.

Yes, if you are an investor looking for a trade.

Speculators  – Short the banks. They are all a mess and are the primary reason the governments of France and Germany are desperate to keep kicking the can down the road. They are terribly over-leveraged and hold far too much lousy sovereign and even lousier real estate and other debt. Consider the obvious: look at puts that expire in the fall on Banco Santander (NYSE:STD[1]), the largest Spanish bank and Deutsche Bank (NYSE:DB[2]), the largest German bank. They bounce around a lot, so look for a good entry point but the longer-term political prognosis and the charts are against them.

Income Traders – The European crisis has day-to-day traders spooked and headed to gold. Longer-term investors, meanwhile, are convinced the European Central Bank is going to create more and more liquidity, and they too are headed to gold. The inflation-adjusted high for gold is roughly $2,400 – gold is now just shy of $1,800. The trade for an income approach? Sell puts on the SPDR Gold Shares (NYSE:GLD[4]) exchange-traded fund. Do it weekly, monthly, whatever. Or buy the GLD ETF and sell calls.

Swing Traders – Those looking for longer-term trades should look at gold’s cousins, the Market Vectors Gold Miners (NYSE:GDX[5]) ETF or an individual miner stock with a good chart and outlook. Consider buy/write trades – buying the stock and immediately selling the call on January positions. Or select an individual name, such as Newmont Mining (NYSE:NEM[6]).

Investors – Investors should consider that banks are in rough shape and are also a mess in the U.S., under 2008 accounting standards that have been suspended. That means that over time liquidity is gong to be created to smooth the repair of their balance sheets. And those needlessly worried about inflation or currency devaluation – if the ECB and the Fed do this at the same time, what gets devalued? – turn to gold. The investment is simple – buy GLD or a cousin, including the iShares Silver Trust (NYSE:SLV[7]). I’d immediately sell calls to generate cash, but some people still see this as voodoo. I’m not a gold bug, but the long-term play here — because there are so many gold bugs — is the GLD and its cousins.



  1. STD:
  2. DB:
  3. 3 Safe Stocks to Profit from Europe’s Debt Woes:
  4. GLD:
  5. GDX:
  6. NEM:
  7. SLV:

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