Early Monday morning it was announced that Greek lawmakers had managed to reach agreement on yet another round of austerity measures that were required by eurozone finance ministers in exchange for more bailout funds. The move by Greece's parliament was expected, as the Greek government had few options remaining beyond a default on the upcoming $19 billion debt payment scheduled for next month.
We placed a very profitable trade in the Advanced Model Portfolio on Thursday on VXX (iPath S&P 500 VIX Short-Term Futures ETN). Doug Robertson's trade netted over $1500 in just 2 trading days with the potential to earn an additional $3100.
The austerity move, a necessary one for Greece to avoid default, is not one that sits well with many in the country, as can be indicated by the second general strike in a week and reports of widespread rioting. Further cuts to wages and pensions are hardly a popular move in this southern eurozone member nation, where citizens have been subjected to an escalating sequence of austerity measures.
Last Friday, the fact that Greek leaders had failed to sign off on a deal that many had expected would be finalized by the end of the week sent the S&P 500 Index (SPX) to its first weekly loss since the beginning of the year, as the benchmark index fell to 1,342, for a drop of 0.5%. The loss brought the SPX below the 1350 level, and this may prove to be a key resistance point for the index.
On Friday Doug Robertson placed a new bearish trade on the SPY based on this news, believing that after a 5 week run up the market is due for a rest or pullback. You can view the new trade here.
However, with the announcement that the Greeks have now officially signed off on the deal, allowing for an additional $171 billion in aid, Wall Street may feel confident enough to continue the recent Bullish trend. A large part of the new bailout will reportedly come from the European Financial Stability Fund, a temporary fund set up to backstop the eurozone's debt crisis.
A Look At the VIX
The VIX (Chicago Board Options Exchange Market Volatility Index) responded to Friday's uncertainty by gaining 11.6% over the course of the trading session. This was the biggest gain by the VIX since early November, and left it at 20.79 as the market closed for the weekend.
Is it too late to acquire the VIX as a hedge for a Bullish portfolio? Hardly. It is still a relatively cheap way to hedge a portfolio. Consider using one of several ETFs that track the VIX for this purpose, such as VXX, as we did on Thursday afternoon. A day later volatility spiked, making the VXX trade over 67% in 2 trading sessions. Doug closed half the trade for a $1500 profit in the Model Portfolio, but remained bullish on volatility so he left half the trade on which can potentially net another $3100.
On the Options Front
Though many sectors of the market have stocks that are hitting new 52-week highs, the financial sector has definitely been something of a laggard. If the Bulls are really going to be running up strong and long, this sector needs to play catch up. One trade to bet that this could happen would be to play the XLF (SPDR Financials Select Sector ETF). It has broken past its 200-day Moving average during the early part of the year, and now could be ready to rise further if the domestic economic numbers continue to improve, as well as the eurozone developing some degree of stability. It would probably require both of these stars to align to really get XLF jumping, but both look like strong possibilities, at least in the short-term.
Potential trade on XLF: Buy XLF APRIL12 15 CALL for a debit of .42. Exit with a 100% gain or a 40% loss.
Happy hunting and make sure you hedge. Whiz