The Way to Trade Greek Democracy

by Michael Shulman | November 1, 2011 12:14 pm

Funny thing about those Greeks – after the close on Monday, they remembered their country was the birthplace of democracy. Thus, they decided their people should vote on the bailout package that has broken their economy, is going to break their banks and pension funds in the coming weeks, and will put the economy into a five-year recession.

Sounds appropriate — except that in all countries, not just in Greece — most politicians have no understanding of the impact on financial markets and the European, U.S. and world economies of a rejection of the bailout.

In other words, there is not one chance in a million that the Greek people will be made to understand what will happen if they reject the bailout.

What would a “no” vote mean? And what would it mean for an investor in the good old U.S. of A., wondering why the vote of a few million people in Greece could ruin their retirement, their kids’ college funds, and their plans to buy that foreclosed house or that used yacht on eBay?

There are two views on the matter, so far.

View No. 1: This is a negotiating ploy – and a very crafty one, I might add – by Greek Prime Minister George Papandreou. The referendum on the bailout is scheduled for January.

He wants better terms – less austerity so the Greeks can continue to employ an unspeakable number of public workers … more capital at a very low cost for the Greek banks (all of them insolvent after the 50% haircut on Greek debt goes through) … and a promise Greece will not be kicked out of the Eurozone if they hit some very soft budget targets.

View No. 2: Papandreou is somewhat sincere. He believes the people need to vote on their future, and the vote will determine if his government falls and a new election is required to find a new set of politicians to negotiate with the powers-that-be in Europe for a different kind of bailout.

Both views have, at their center, a political calculus by the Greek prime minister that is both cunning and terribly flawed.

It is cunning because, alone among the Europeans, he recognizes time is not an independent variable. The longer the uncertainty, the more the bond market loses faith in the debt of Greece, Portugal, Ireland, Spain, Italy and, whoops, France.

Plus, he stands a chance of getting better terms as markets deteriorate and the crisis spreads.

However, it is terribly flawed because the Greek voters do not really matter. The only voters that matter are those paragons of fiscal virtue, the good Germans — those people who are happy excoriating others while their own banks are the worst-capitalized in the developed world. But hey, some dumb banks had to loan money so people could buy our products and keep unemployment up.

Let’s put away the current events analysis and focus on you – what can you, the individual investor, do?

Your Short-Term Trading Strategy

Right now, you need to be very wary of putting new money to work on the long side unless it is very long-term – i.e., three years or more – capital.

The short-term trades – i.e., two months or less — are all about fear. Those include gold and its cousins (the gold miners and silver) and volatility. Be sure to keep a close eye on the CBOE Volatility Index (CBOE:VIX[1]), the market measure of volatility that’s sometimes referred to as the “fear index.”

There is no way to know tomorrow’s headlines. Plus, you don’t necessarily need to own anything if you are focused on the short term. The way to play it, then, is to sell puts on key stocks and Exchange-Traded Funds. That way, you get to collect some short-term cash while the Greek tragedy keeps adding new acts.

Sell puts on the SPDR Gold Trust ETF (AMEX:GLD[2]), the Gold Miners ETF (AMEX:GDX[3]), the Silver ETF (AMEX:SLV[4]) and the iPath S&P 500 VIX Short-Term Futures ETN (AMEX:VXX[5]), which is the ETF for the VIX.

I also like the very obvious play on the dollar going up as the euro falls. The ETF for the dollar is the PowerShares U.S. Dollar Index Bullish (AMEX:UUP[6]). A good way to play UUP is to buy it and then sell calls against it (i.e., the covered call strategy).

Your Longer-Term Trading Strategy

Even before this latest Athenian hiccup, some great names were selling very cheap. These are strong covered-call candidates to ride throughout the turmoil.

My favorites are GLD, SLV, Deere & Co. (NYSE:DE[7]), Potash (NYSE:POT[8]), Apple (NASDAQ:AAPL[9]), Amazon (NASDAQ:AMZN[10]), Ford (NYSE:F[11]), General Motors (NYSE:GM[12]) and a gold miner, Newmont Mining (NYSE:NEM[13]).

To get started, you’ll build positions in 100-share increments and, five nanoseconds after you own them, turn around and sell short-term calls against them.

All of these names not only have monthly options, but they offer weekly options as well.

If Apple is at the same price a year from now, you can generate the equivalent of a 15%-24% dividend. This is pretty much the story for all these names.

You can take the cash and spend it … or you can average down your costs by buying more shares … or you can use it to hedge your entire portfolio against Greek democracy by buying some way, way out-of-the-money puts on the S&P 500, as a “just in case” trade.

Things are going to get more volatile — and even-more interesting — before we can see clearly what is gong to happen in Athens, Berlin, Europe, here and throughout the world markets. Stay tuned!

  1. VIX:
  2. GLD:
  3. GDX:
  4. SLV:
  5. VXX:
  6. UUP:
  7. DE:
  8. POT:
  9. AAPL:
  10. AMZN:
  11. F:
  12. GM:
  13. NEM:

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