The Way to Trade Greek Democracy

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
), 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 ), the
Gold Miners ETF (AMEX: GDX ), the Silver ETF (AMEX: SLV ) and the iPath S&P 500
VIX Short-Term Futures ETN (AMEX: VXX ), 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 ). 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 ), Potash (NYSE: POT ), Apple (NASDAQ: AAPL ), Amazon (NASDAQ:
AMZN ), Ford (NYSE: F ), General Motors (NYSE: GM ) and a gold miner, Newmont
Mining (NYSE: NEM ). 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!