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?