Market Crash Coming on Monday?

It isn’t supposed to be a monthly event, but it wouldn’t surprise me if we were in the same situation in July or early August.  That’s assuming that the financial markets don’t execute an apocalyptic crash between now and then.

Yes, it is time for Grecian Follies - Part Two. 

Ahead of the last round of elections on May 6th, I penned the article, “In 72 Hours The Whole Market Could Crash” suggesting purchasing puts on the SPYs and staying long TLT, essentially a short equities and long bond position.  Now of course the market didn’t crash, but both trades have played out, and you may be getting the opportunity to take another shot at this one.

 
If you got in around the close on Friday, May 4 you are still up, but both trades are off their peaks set in the first few days of June.  Even if you waited until Monday, May 7 to get in, you are still up nicely.  No worries, as I mentioned in the original article, markets are terrible at discounting elections so you still have time and a couple of trades to play it.


No Polls Allowed

For the past 10 days, political polling in Greece has been officially prohibited.  That’s not a terrible idea.  I for one could do without the second by second poll results that the US is in for as the November elections loom, but that’s a different story.  The point is that there is no current information on this horse race... but we can guess.

The “anti-bailout” and left SYRIZA party, led by young upstart and rabble rouser Alexis Tsipras, took nearly 17% of the vote in the last round.  The two parties who have run Greece since its independence, New Democracy (ND) and PASOK, got 18.8% and 13.3% respectively.  The problem is that even together they could not cobble together the 151 seats in the Greek parliament necessary to form a coalition government.

In the days before the polling stopped, there were indications that the two leading parties were running neck and neck in the low 20% range.


More Fuel In The Fire

Last weekend’s proposed Spanish Bailout Lite showed a tremendous amount of willingness on the part of EU officials to bend the rules.  The Spanish have already received extensions on reaching their deficit and debt-to-GDP goals, while the Greeks have received little.  Yet the EU has seen fit to find a way to inject capital into Spain without any additional preconditions.

Seeing that, EU officials are already squirming with Spain; it seems to be having an impact on paymaster Germany.  This might lead a few additional Greeks to cast a ballot for the anti-bailout party, SYRIZA.

It’s clearly not going to be a landslide by any of the half dozen Greek parties vying for power, but it’s also not likely that any one party will win enough seats to gain outright control of the government.  So it’s back to forming a coalition.  Good luck with that.


A Fly in the Ointment

Let’s say that a coalition government with just over the 151 seat threshold is formed prior to Monday’s open.  Promises will be made and Greece will get another round of funding since it is scheduled to run out of money in July.  Additionally, the Fed and ECB, which have been sitting on the sidelines, are likely to come out with pop-guns blazing.  There is no bazooka to solve these issues, no matter what you hear about coordinated central bank actions.

With “clarity” on the Greek situation and the central banks chiming in with their support, the S&P could see 1350 on Monday morning.  It might even follow through for a few days, clearing the mildly oversold conditions in the market.

Unfortunately, promises are meant to be broken, and as the bureaucrats scramble to pick up the rest of crumbling Europe, this potential euphoria is likely to wane before the end of the month.


Getting a Piece for a Reasonable Price

I won’t deny that there is always the possibility of a fly in the ointment.   That is why you can use options to minimize risk and still give yourself a shot at triple digit profits over the next month.

For both the SPY and TLT, vertical spreads can be used to give yourself that kind of risk/reward scenario. 

I am not going to get into the details of this strategy today because Costas recently covered them in his article “Profit from the Worst IPO in History”.  Additionally, you can search “vertical spreads” on our website and find nearly 40 articles that provide the ins and outs of this strategy.

As of yesterday’s close, the SPY July 129-134 put spread could be purchased for $1.70.  This involves buying the July 134 puts and selling the 129 puts in a 1-to-1 ratio.  The maximum value of the spread is $5.00 if the spread is held until July expiration and the SPY closes below 129.  That is 194% profit potential while limiting your risk to the cost of the spread, or $1.70.

Similarly, the TLT July 125-130 call spread could be purchased near yesterday’s close for $ 1.95.  This spread will reach its maximum value of $5.00 if TLT closes above 130 on July expiration, a 156% profit potential.

Remember, no single trade or position should put too much of your capital at risk.  This is particularly true of speculative trades like these.  Also, both of these trades are essentially on the same side, meaning that if one goes wrong both are likely to go wrong or both will go right.  So you might want to choose only one of the two.  Either way you have a couple of ideas to work with. 

You never know, maybe Sunday’s election results will be all sunshine and lollipops, but I don’t see it that way.

Ed Pawelec
Contributing Editor
Price Shock Trader