I am not going to miss all the election ads and political screeds brought forth from the Super PACs and the not so Super PACs.? This time tomorrow some decisions will have been made on who rules for the next four years.? I am guessing the Fiscal Cliff solution will happen by Jan 1st since we cannot keep the $ 1 Trillion of spending going forever unless this country wants to emulate the cradle of democracy, Greece.? This brings me to trading the FXE.
There have been at least 3, if not 4, years of trying to settle this mess.? Yet another election about a bunch of austerity and market reforms handed down by a troika of creditors to keep the ball rolling downhill.? That election is Wednesday and Greece is out of time if it wants to refinance bank debt and keep the country on a restructuring trajectory.? I guess it is possible to run out of time and money (as many beginning option traders know).
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The Euro hung above the $130 level when Mario Draghi was talking up the big bond buying program. That gave banks and hedge funds some room to buy up the debt of Spain, Greece and Italy that was floating around at big interest rates.? Greece?s problem is that certain groups in the ruling coalition do not want to engage in the reform activities that will make it grow.? That is spooking the FXE down to pre-Mario announcement levels.? What I find curious is that if the demise of Greece is so bad for the Euro, why doesn?t the option volatility pick up.? Note that it finally did today (see above) but only after 3 good down days.
The break below $128 on the Euro got folks nervous today.? The FXE is down $2 in 3 days waiting for these election results and the IV finally started to kick on the realized volatility.
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If the markets were really worried FXE volatility would not be trading at year lows.? It would be trading at year highs.? I expect to see the little vol pop subside this week with a healthly bounce back once some details get worked out.? The volatility is so cheap (even with today’s small uptick) in the FXE it is better just to buy the gamma and hold it for a week. ?
The Trade
Buy the Nov ATM straddle in the FXE (or go farther out).? Since betting on a sure outcome has been iffy when it comes to Greek voting, better to go with the fact that the Euro (and it?s ETF doppelganger, FXE) will make some recent lows, or some fresh high real soon.