How Greece Is Just Like a Biotech

Implied volatility on GREK options is 'ginormous' as Greece draws ever closer to a debt repayment deadline

Jun 29, 2015 at 9:33 AM
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Market predictions are generally kind of pointless. Actually making money in the trading biz generally requires excellent timing, and predictions are almost always vague on that front. But with that in mind, I'm going to make a prediction that has 100% chance of success.

Here it is: This Greek debt situation never gets resolved. I feel safe in saying that my grandkids are going to see stories about the ongoing debt negotiations via hologram while traveling to school in their hovercrafts.

But anyway, that's not stopping some bullish bets! This, via Bloomberg:

"Even as Greece inches closer to default, U.S. traders are more worried about missing out on a rally in the nation's stocks.

"Bullish options bets on an exchange-traded fund tracking Greek shares have risen to a record. There were more than twice as many calls than puts -- a higher ratio than on funds tracking equities of Germany, Spain and Italy.

"Investors are willing to take a gamble on a market that's been four times more volatile than the U.S. this year amid a change in government and five month of unproductive bailout talks. They've added money to the Global X FTSE Greece 20 ETF every single week since January, with inflows of almost $34 million in the past four days."

Now, normally, I'd say that’s pretty bearish. I mean, Greece is getting clocked, yet all traders want to do is play for a turnaround. That's usually a contra tell. Everyone loves calling turns, but trends themselves love continuing.

But alas, that's not a great description. I just kind of assumed from the TeeVee that before today, Greek stocks were down huge this year. Thing is, they haven't done all that terribly.


Going into Monday, the Global X FTSE Greece 20 ETF (GREK) was down about 12% in 2015, but it's flat over the past 3.5 months -- meaning it moves about 0% for every 10,000 stories. The big hit took place in 2014, as GREK has lost half its value in a calendar year.

The implied volatility here is positively ginormous. It resembles a one-product biotech awaiting FDA approval for something. The GREK "VIX" sits at 95, and that's actually down a bit from a peak of around 113 earlier this year. On the other hand, GREK options traded at about a 40 vol this time last year.

Realized vol has taken a similar trajectory. Ten-day realized volatility (RV) sat at about 26 this time last year, rumbled all the way up to 137 this February, and now looks downright peaceful in the mid 60s.

I'm not sure traders were really "predicting" a GREK rally so much as some sort of resolution in the the near term. That’s a real sizable overbid to already high realized vol.  

That convinces me more that my "bold" prediction will prove prescient. We will never stop hearing about this story. Traders are going to keep rolling this options paper the same way they roll CBOE Volatility Index (VIX) calls every month.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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