Play the Greek chaos with limited downside

SCENES of riots in Athens have filled our television screens and newspapers this week, heightening the sense of chaos that is gripping the country. Against this backdrop of unrest, even the €110bn bail-out package from the International Monetary Fund and the European Union agreed last weekend, has not been enough to calm the market’s fears of a default and contagion.

Bonds have been the primary casualty of the crisis – yields on Greek debt have shot up and yesterday were as high as 14.54 per cent for two-year notes, 12.32 per cent for five-year and 10 per cent for 10-year government bonds.

However, while the debt crisis has not yet spread to other Club Med countries, its effects have not been limited to Greece. The euro has taken a battering – even against the weakened pound, it has fallen 4 per cent over the past month. And against the US dollar, it is down 10 per cent since mid-January and yesterday it fell below the critical $1.30 level.

And the stock market indices of the Club Med countries have also slumped. The Spanish Ibex 35 fell 1.78 per cent yesterday, adding to the stock market’s 14 per cent plummet over the past three weeks. Portugal’s PSI20 is also off by a similar percentage over the same time period and yesterday it fell 2.5 per cent. And in Greece, even a short-selling ban implemented on 28 April has not been enough to keep the Athens stock index buoyant for anything more than a few days. Selling resumed in earnest on 30 April and the index is now some 140 points lower already.

But with all the volatility and uncertainty created by the situation, it can be difficult for investors to know just how to play the crisis and how to keep their portfolios protected from the choppy markets. Thankfully, though, there are a couple of products that traders can use to cash in on the crisis without leaving themselves over-exposed to the whims of the markets. Covered warrants are ideal as you can buy a put warrant – the right to sell for a predetermined price at a predetermined time – which gives you limited downside should the markets turn against you. You can use these either to speculate or to protect any euro-denominated assets you might hold.

Both Societe Generale and RBS offer covered warrants on the DJ Euro Stoxx index, which contains the 50 largest stocks in the Eurozone and a number are Spanish-listed such as Iberdrola and Santander. However, for those looking at the future of the euro, there are now currency covered warrants on both euro-sterling and euro-US dollar. Ben Board, head of sales at RBS, says that currencies tend to be much more volatile and see more dramatic moves, which makes their gearing higher. However, because your downside is limited, using covered warrants is a good way to try a slightly more risky trade than you might otherwise be prepared to make.

If you think the euro is going to come under pressure from the Greek crisis over the next six months or so, then you would want to buy a put covered warrant. On the other hand, if you think that we are likely to see a hung parliament in the UK and that sterling could fall even further against the euro, then you could buy a Societe Generale call warrant with sterling-euro as the underlying security.

If you’d rather play the slightly less volatile stock markets, then exchange-traded funds (ETFs) are an easy and cheap way for investors to gain access to other stock markets and give you diversified exposure to all the index’s constituents. However, for the individual investor, the opportunities to play the Club Med stock indices are somewhat limited, especially if you want to go short. But if you think that the markets have overshot and will be due a correction as the situation calms down, then you could look to buy an ETF. Your best bet as a private trader is to play the DJ Euro Stoxx index, but professional investors can get exposure to the MSCI EMU index and the MSCI Greece index through Lyxor’s ETF offering. BlackRock’s iShares offers US-domiciled ETFs that track the performance of the MSCI Spain Index and the MSCI Italy Index.

The crisis might be causing a headache for traders at the moment, but there are plenty of ways to play the markets without ending up with Club Med-style debts.