Instead of writing my usual post about trade setups, I thought I’d write something different for two reasons:
1) I really didn’t like anything going into the Friday before the Greek elections which could get really ugly
2) I didn’t want to be holding any Spot positions going into Friday’s London session since the markets now rumor driven
So what I decided was to talk about an alternative to playing a spot position going into this weekend.
The Background
First off, not sure if you have gotten the warnings, but several brokers have decided they will shut down trading operations until after the Greek elections due to the significance of the event and possible volatility it could create. So far, Oanda, FXDD and a few others have decided upon this line of action and I’m guessing others will do so as well.
In reality, this is a good thing because trading spot in an environment like this could get ugly. If you're on the wrong side of the market when the $*#$)(# hits the fan, your stop could get kicked. Remember, stops are really market orders to get you out at a price you’d like to. But if the market never prints that price of your stop, and say jumps 100-200 pips after the election, you are in effect responsible for the entire loss as the next market price printed is when your stop will get filled. Again, no market printing at the prices of your stop, no stop getting you out at that price.
Another Alternative
So in lieu of that, trading spot or holding any spot positions over the weekend would be IMO a bad idea.
HOWEVER – there is another alternative which is an option play and many brokers accept these. If you think the EUR/USD is going to get hammered after the Greek elections – taking out a put option on the pair wouldn’t be a bad idea. The beauty of it is there will be no stop to get kicked, so depending upon the style of option you take, you could set it up for a fixed risk and thus participate in the market.
You may also not want to play the EUR directly, but think the USD will benefit as everyone flocks to the safe haven (which is really interesting since the US economy is in bad shape, but that’s what people do in times like these is buy USD’s) so you could place call options on USD pairs, such as the USD/CAD, or USD vs. AUD, or any high yielding pair. If risk is off, then the high yielding pairs will likely get hit.
Or, you could just stay out of fiat as a whole and buy gold, either physical or call options on that as well, particularly vs. the EUR.
But lets say you have a trade you are already in profit and don’t want to let go of. Then at least consider hedging the position with an option that has unlimited upside if the position goes against your spot play so you can fully hedge the risk.
Some notes to consider ahead of the event:
- EUR/USD 1 week implied vol is at its greatest premium to realized vol ahead of this weekend over the last 3.5yrs. The last time short dated vol was at this level, was Dec. 9th, 2011 and the EUR/USD fell over 400pips in a few days
- It is possible the election will not give us the final word as to whether Greece stays in the EZ because Tsipras has stated he may be prepared to negotiate a new deal on the lending terms which means we may not know the answer for days, maybe weeks after the election
- It is also possible central banks may get involved to stabilize things if volatility gets really ugly after the elections so we could see a lot of artificial price action should this materialize. Especially if the euro gets hammered and the SNB has to work really hard to hold the floor which we think eventually will cave in the near future
Anyways, that is my take on it relating to the possible madness that may manifest from the Greek elections on the 17th. But whether you decide to play or not, definitely have your popcorn and drinks ready as this could get interesting. I for one am expecting continued deterioration in the global economy and increasing volatility for the rest of the year which we will talk about in the near future how to profit from all the upcoming potential volatility.
Global Market Commentary
Spanish 10yr yields gave a kiss to the 7% barrier with Italian yields rising as well. This will continue to put pressure on them as their borrowing costs to insure those bonds increase when they are already cash strapped. Keep in mind the S&P just released a report the Spanish housing market will likely fall another 25% which would crush the banks completely and likely trigger a full Spanic Default so regardless of what happens in the upcoming Greek elections, another devil is waiting around the corner in the region.
Meanwhile, rumorville was in full tilt today as reuters reported central banks may step in to provide liquidity should a credit squeeze ensue. The UK said it would also flood the markets banks with cash and cheap funding to encourage lending to businesses (since that worked so well the last time in 2008/09).
We still think the real winner in all this will be safe havens and precious metals. Speaking of which, Gold has gained again adding another $4.60 on the day while the Dow closed up 155pts on CB rumors while the S&P gained 14pts.