Buy Puts on the Euro

Is it time to buy puts on the Euro or are the Greeks going to adopt the austerity measures required for a Euro Zone bailout on their national debt? For that matter will Euro Zone fiscal austerity measures work? Whether a Forex trader is going to buy calls on the Euro or buy puts he needs to look at the short, medium, and long term consequences of today’s events. He also needs to look at the factors that drive whatever other currency he is trading as currencies are, in fact, traded in pairs.

Short Term

Euro trading is currently uncertain because of the painfully slow resolution of the Greek debt crisis. Greek creditors will need to accept a write-off on part of their bond investments in order for the European Union at large to continue to finance the rollover of Greek debt. The next installment is due in March. If negotiations fail, and many believe they will, Greece could end up withdrawing from the European Union. Most traders believe such an event would lead to a fall, at least temporarily, of the Euro. To the degree that traders are already discounting this the fall would be less. Nevertheless, if you believe that the Greek debt talks will fail you may want to buy puts on the Euro.

Medium Term

The Greek debt situation is going to resolve itself, for good or for ill. The next item on the agenda is the collection of austerity measures that European nations are undertaking in order to reign in their massive debt. The general consensus is that such measures will lead to a recession in Europe. With Europe in a recession exports from China will fall as may those from North America. If China reduces production Australia will export fewer raw materials to the Chinese industrial machine. Whether the Greek situation turns out well or badly the Euro may fall anyway, in the medium term. For this reason one may choose to buy puts on the Euro now. But, which currency do you use to buy the puts? The US economy seems to be brightening. Brazil has seen a drop in its economy but is coming back. How about Russia? Typically stable currencies include the Yen and Swiss franc but both nations have purchased huge amounts of foreign currency in order to keep their own from rising too fast and to high. If you buy puts on the Euro with Swiss francs will your profits disappear when the Swiss buy huge quantities of Euros in order to keep Swiss exports competitive?

Long Term

If you are going to buy puts on the Euro with the intent of getting rid of all of your Euro holdings you may be wrong. The measures being taken on the continent are probably the right ones. The agreement to put controls on local spending and generally agreed upon austerity measures will likely bring the European economy back on track. European exporters will, in fact, benefit from a fall in value of the Euro. Strong exports and fuller employment will lead to a stronger Euro, eventually.

As always when trading foreign currencies, do your own technical and fundamental analysis and do not trade if you do not fully understand the situation.