Trading The Greek Referendum

Includes: GLD
by: Michael Shulman

What do we now about the situation in Greece?

We know there will be a referendum in Greece barring a surprise no-confidence vote in the Greek Parliament.

We know there is a movement underfoot to push the referendum up to December.

We know December referendum gives the Europeans time to manage a Greek default in late January (my date) if they reject the bailout and run out of money.

We know this puts pressure on European leaders to come up with a better bailout plan and default plan than the one on the table. Right now, the 50% haircut does not apply to debt held by the ECB, and with that debt the amount the Greeks will have to pay back is still way too large.

How to trade this? Time for man to bite dog. I sense – almost believe – the end game being in sight is going to calm and boost markets. An end game is in sight. Either Greece defaults and ends up leaving the euro, giving Europe a chance to surround Italy with a financial firewall or Greece says help us and the government gets the political support it requires to fire public workers (this requires a constitutional amendment), restructure its debt and do whatever else the Germans insist they want the wayward Greeks to do.

I could regret this belief – but I know that certainty in a bad outcome is a simpler platform to trade than uncertainty in one of many lousy outcomes. I sense traders will trade the certainty a referendum will take place for the next month, then trade whatever happens in the referendum, and then trade the coming European recession and the continuing financial crisis – this time Portugal and Italy – as events occur.

Is there a specific trade to look at? I like gold – calm means no liquidation events, gold has a bit of a way to go before it hits the $1,800 or the $180 ceiling on the GLD. Traders, look at selling some puts. Investors, I am one of you, I invest more than trade, I own the GLD and typically write calls against it, generates a potential “dividend” of more than 15% a year.