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How to Trade the Collapse of the Eurozone

How to Trade the Collapse of the Eurozone

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Published by Elite E Services FX
How to trade the collapse of the EU
How to trade the collapse of the EU

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Published by: Elite E Services FX on Jun 08, 2012
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Elite E Services, Inc.1201 Main Street Suite 1980Columbia, SC 29201Web:www.eliteeservices.net Blog:www.eliteforexblog.com Forex Portal:www.eesfx.com 
Elite E Services, Inc. Forex Trading & Technology
www.eliteeservices.net info@eliteeservices.net
How to trade the collapse of the Eurozone
 This article will explore the various technical methods to trade a potentialcollapse of the EU, it will not recommend any specific course of action.
US Stocks that do business in Europe
How is it th
 
at European news is causing US stock markets to drop?
i
Many USissues generate a large percentage of their revenue from the Eurozone. Adecline in the European economy would mean a decline in their revenue. Acomplete collapse of the European economy could mean a significantdisruption in that part of their business.McDonald’s being a good example, in a recent earnings release; McDonald’sblamed problems in Europe for sluggish numbers.
A big drop in the Europeaneconomy could put a dent in McDonald’s earnings, and thus cause the stock todrop. The problem with this strategy is that investors may not see an immediatecorrelation, thus, it may take weeks or months for it to play out. For example,it would be unlikely that as bad news about Europe is announced, McDonald’sstock is dropping. So this strategy should be researched carefully.
Euro Options
Available through most major clearing houses, options on Euro futures providea good way to bet on a Euro collapse with controlled risk. Options are theright but not the obligation to buy or sell the underlying contract.Warning to new options traders! Do NOT short options! It is possible to buy aput or a call, so it is possible to bet that the Euro will go up OR down, withoutshorting options. Shorting options is for investors who already have theunderlying instrument and want to generate premiums from it.If you want to bet that the Eurozone will not succeed with their debtrestructuring, you may want to purchase an option ladder. This would be doneby purchasing 5 long puts at 5 prices. The exact prices will change based onmarket demand, but your broker should provide some information as to themost significant strike prices, such as 1.25, 1.24, 1.2350, 1.22, 1.21. The goodthing about this strategy is when you purchase the options you know howmuch you are going to pay for them up front. If you are wrong, you have theknown investment in the strategy (the cost of the option) which can bemodified according to how much you want to invest in the strategy.
 
Elite E Services, Inc.1201 Main Street Suite 1980Columbia, SC 29201Web:www.eliteeservices.net Blog:www.eliteforexblog.com Forex Portal:www.eesfx.com 
Elite E Services, Inc. Forex Trading & Technology
Bond futures
Euro-bund German Government – Sep 2012 The chart shows thepremium of a futurescontract representingGerman governmentbonds (Bun
 
ds
), theGerman equivalent of a US Treasury Bond.March levels were136, as of this writing(6/3/2012) the price is145. This would havebeen the equivalent of a 7% return in 2months, using noleverage.Why are investorswilling to pay such apremium for a Government bond? With so much fear in the Eurozone, it is oneof the only local perceived ‘safe havens’. Also, money is flowing into Germanyfrom less stable states such as Greece and Italy. Of course, this contract isdenominated in Euros, so the safety is a lot of perception, as a collapse in theEuro would wipe out all Euro denominated value. However, in the short run, if you are a short term trader, it would have been possible to make 7% in 2months trading this contract with no leverage.Looking at the discrepancies of the varying interest rates shows howEuropeans gauge the stability of the government, for example a German bondwill pay 4% whereas an Italian bond will pay 8% or more. This is known as the‘spread’ and many institutional platforms such as Bloomberg will allow you totrade these instruments
. Aside from that, we can use them to determinemarket sentiment. These are a few ways to trade the collapse of the Euro. Be advised: If the Eurocollapse accelerates, we can expect extreme volatility so it is a strategy thatshould be monitored closely.

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