Hedging Is A Way To Play Spain

| About: iShares MSCI (EWP)

Today we seen Spain again complete a successful sale of up to 10 years in its treasury market. The demand was pretty good with yields roughly in line with the 10-year at 5.4% vs. the last auction rates of 5.54%. On Tuesday, Spain sold 12-month and 18-month bonds with pretty good success. After receiving the downgrade of S&P by two notches, one would have thought higher yields and extreme volatility would have shook the market.

Does this right away imply that Spain's economic downturn is over? No. Why buy a 10-year bond from Spain at 5.4%, when you can collect a distribution yield of over 9.68% with Ishares EWP?

How to trade this gets better.

  • Buy the EWP at a market price of $30.64
  • Buy the Jul 21 2012 $34 Put at a price of $5.75
  • Cost Basis: $36.39

Right? Wrong. Ishares Spain Index doesn't do anything these days, and trades straight down, slightly down, or sideways. Well, check this out.

  • The put was in the money by $3.36
  • The investor collected roughly $1.46 in dividend yield
  • Total VAR (Value at Risk): .96 cents or roughly 3%

A truly hedged way to play Spain or a euro crisis resolution.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EWP, VXX over the next 72 hours.

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Tagged: , Options, Spain
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