How Greece's Lack of a Bailout Package Is Affecting Investors
One of the easiest ways to trade these volatile conditions is to trade volatility itself.
Over the last two weeks,
Greece has had a rocky history in its fundraising efforts. In 2011, when a bailout package was agreed upon by the country as well as certain allies, Greek Prime Minister George Papandreou decided to not pass the bailout package himself. Rather, he decided to hold a referendum. Attempting to pass an important measure via popular election may or may not be detrimental for the nation's well-being.
Papandreou's decision was disheartening for many investors, evidenced by significant downturns across global markets. Almost like an identical echo, the lack of clarity in Greece's current deal is making global investors nervous. Ultimately, investors want to know what to do to protect themselves from volatility.
Let's face it, one day, the Dow swings up 2%, and the next, it swings down 2%. Unless you are a professional trader and have been doing this for years, it can be very difficult to trade the swings associated with the news. In fact, many professional traders cannot even keep up with the madness themselves!
One of the easiest ways to trade these volatile conditions is to trade volatility itself! Depending on your risk profile, you may want to stick with equities or perhaps equity derivatives. To trade volatility based equities, look at securities that track the VIX, which is the Chicago Board Options Exchange Market Volatility Index. One stock that follows the VIX is the iPath S&P 500 VIX Short Term Futures Exchange Traded Note (VXX). If you believe the market is going to swing up one way or another, going long VXX would be a smart idea. This is a non-directional bet, so you will make money regardless if the market rallies or declines.
You could also pursue similar strategies using options or futures. Although the derivatives typically involve other factors, it is possible to make lucrative profits. Investors need to be aware that options and futures have added layers of complexity, however. Options, for example, have components including time decay and implied volatility that are used to compute option price. Futures are typically employed using high levels of leverage.
While derivatives may seem extremely risky, certain strategies are extremely useful for our purposes. One non-directional strategy involves options, and is called the straddle. The straddle essentially involves going long a call option and a put option at the same strike price, typically at the money. This strategy is useful when there are large moves in either direction in the underlying equity. For example, if you are confident that Google (GOOG) will move 5% in either direction due to its earnings announcement, then a straddle may be the way to go.
An alternate options strategy is the strangle, which is very similar to the straddle strategy. The strangle is different in that the options contracts are not necessarily purchased at the money, but a little in the money or out of the money. This is a slightly biased bet, and should only be implemented if you want the safety associated with the straddle but still have a strong view on the direction of the security.
When investors all over are scrambling to protect their assets in these volatile markets, the retail investor could have the upper hand. Instead of losing money in large positions, it is possible for you to make hedges in a non-directional fashion. Especially since Greece has been unable to lock down a bailout package, no one know what will happen to the country within the next several weeks. It is important to keep your eyes on the news as well as know the strategies.
Editor's Note: This content was originally published on Benzinga.com by Abhi Rao.
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