Greek bailout talks begin again next week, but recent developments indicate a deal is not as close to being reached as initially thought.
While a failed deal could create uncertainty in global markets, we found a profit opportunity to capitalize on the increasingly volatile situation.
On April 7, Greece announced it had reached an agreement on key aspects of a deal needed to release the next round of bailout funds with its lenders, the European Central Bank (ECB, headed by Germany) and the International Monetary Fund (IMF). Those key aspects were pension reforms and liberating the energy sector.
However, on April 12, the head of the IMF, Christine Lagarde, said they were only about halfway there on a bailout agreement for Greece.
This is a big deviation from the stance of the ECB and Greece...
This One Sticking Point Could Derail Greek Bailout Talks
The biggest issue that stands in the way of a Greek bailout deal is restructuring Greece's debt.
The IMF wants to restructure the debt load as well as forgive some of the country's debt. Without reducing the debt burden, Lagarde questions whether Greece will be able to meet its obligations.
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Greece was able to beat its required budget surplus of 0.5% GDP, with a reported budget surplus of 3% of GDP in 2016. That's a sign to Germany that the austerity measures are working. However, that surplus does not account for the country's debt payments, which will be larger than the budget surplus. Add that to a declining Greek economy and Lagarde is concerned about the long-term sustainability of Greece's finances.
While the IMF is determined to give Greece a break on its debt, Germany has refused to consider a debt haircut as an option. This opposition between lenders has already stalled the Greek bailout talks that began last year. Neither party seems willing to soften its stance.
To make matters worse, even if a deal is agreed upon, it may still be rejected in the Greek Parliament.
After a deal has been made, each of the European countries in the EU must vote to approve the agreement in their individual parliaments. That poses another problem for Greece.
Greece's prime minister, Alexis Tsipras, has been facing mounting pressure at home for snap elections (you can find out what they are here) from the Greek Parliament.
His party, Syriza, does not hold an outright majority. Instead, it holds the most seats at 48.33%. So even if everyone in his party votes to approve the bailout deal, it may still be rejected.
Given that many in Greece are strongly opposed to additional austerity measures, especially on pensions that will be affected by the new deal, it is likely the bailout deal will not pass.
At this point, rising tensions almost assure that whenever an agreement is reached, and passed, it will likely be the last bailout for Greece. If the country can't get a handle on its finances with the current bailout package that ends in 2018, it may end up leaving the euro.
Consequently, this volatility has created an excellent profit opportunity...
Don't Let the Volatility Scare You Out of 58% Profits
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When Greece defaulted on the IMF on June 30, 2015, the euro dropped 2% in just two weeks.
While that may not sound like a lot, you have to keep in mind that Europe was fairly stable at the time. This time around, Europe is anything but stable.
The French elections are causing concerns over a French exit of the EU, while the UK prepares for snap elections. Then, this fall, Germany has elections of its own.
All of this uncertainty is going to cause even more downward pressure on the euro if Greece misses a debt payment in July.
Between now and July, it's not unreasonable to expect the euro to drop at least 5%, especially if Greece does not get a bailout deal in time and the French consider leaving the EU.
That brings us to our profit opportunity: shorting the euro. Although you can short the euro outright, Money Morning Capital Wave Strategist Shah Gilani recommends buying the ProShares UltraShort Euro Trust ETF (NYSE: Arca: EUO).
This specific ETF is a leveraged short ETF, which means that for every 1% the euro declines compared to the dollar, the ETF rises by 3%. If the euro drops 5% by July, you would make 15%.
To further reduce your costs and increase your return, you can purchase call options for the EUO ETF.
Currently, August call options for the ETF with a strike price of $27 are trading at $0.90 a contract. If the euro drops by 5% between now and July, you can make 58.9%.
If the euro drops 5%, EUO will gain 15%, or $1.1147 per share. The call option has a delta of 0.47547. If you multiply the delta by the price increase, you get the amount the call option will appreciate, in this case $0.53 per share.
Each call option controls 100 shares. So the cost would be $90 to get into the trade, and your profit would be $53 per contract for a gain of 58.9%.
While many investors flee the markets when volatility is high, our readers know there is always a profit opportunity.
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