The latest crisis emerging in Europe is the Italian debt crisis. While Greek Default is already a given, Italian debt is looking more risky, with Italian bond yields rising to record levels of around 7%. As opportunistic traders, option traders can find opportunity in the Italian debt crisis.
The question is – what are the best investment vehicles to profit from the market panic related to the Italian crisis?
Option traders need investment vehicles that have:
- publicly traded options
- narrow bid-ask spreads
- high liquidity as evidenced by high open interest and option volumes
We’ve sifted through the possible trading vehicles to find some gems that can be used by option traders to profit from the Italian debt crisis.
Italian stock market ETF
The only ETF on the Italian stock market is the Ishares MSCI Italy Index fund (EWI). This fund aims to correspond to the performance of the Italian Stock market as measured by the MSCI Italy index.
The fund is made up of the major publicly listed Italian companies such as ENI, ENEL, Telecom Italia.
EWI provides a good vehicle for stock traders to speculate on the direction of the Italian market. For option traders it makes a reasonable, however not ideal vehicle.
Currently the EWI ETF is trading at around $12.79. This is a relatively low price and means that proportionately option traders will need to pay relatively more in terms of commissions and that there is less flexibility in terms of strike price selection.
The open interest and volumes are reasonable although not ideal. Open interest is relatively high for put options (in the 1000’s) but only in the hundreds for call options.
Additionally the bid-ask spread can be as high as 30c for at-the-money options!
Therefore EWI can provide good exposure to the Italian market, however for option traders it isn’t an ideal vehicle.
Italian American Depository Receipts (ADRs)
Instead on investing in a Italian Stock Market Index ETF, another option is to invest directly in individual Italian stocks.
The easiest way to do this for US based traders is to invest in Italian companies which have ADRs listed on US exchanges.
Below is a list of Italian ADRs listed on US exchanges:
ENI SPA
- Symbol: E
- Ratio (depository receipts to ordinary shares): 1:2
- Exchange: NYSE
- Sector: Oil and Gas Exploration
- Options: Yes – low liquidity and wide bid-ask spread.
GENTIUM SPA
- Symbol: GENT
- Ratio: 1:1
- Exchange: NASDAQ
- Sector: Biopharma
- Options: No
LUXOTTICA
- Symbol: LUX
- Ratio: 1:1
- Exchange: NYSE
- Sector: Sunglasses manufacturer and distributor
- Options: Yes – very low liquidity
NATUZZI
- Symbol: NTZ
- Ratio: 1:1
- Exchange: NYSE
- Sector: Furniture
- Options: No
Telecom Italia
- Symbol: TI
- Ratio: 1:10
- Exchange: NYSE
- Options: Yes – very low liquidity.
Again, Italian ADRs can provide good exposure for share traders to the Italian stock market. For option traders these Italian ADRs do not provide good investment opportunities due to extremely low liquidity.
The winner? Euro ETFs for a punt on Italian debt
From our investigation, the best vehicle for option traders to speculate on the Italian debt crisis are the euro ETFs.
EUO is the Proshares Ultrashort EURO ETF. This fund seeks a return of -200% for the daily performance of the USD price of the EURO. While the bid-ask spread is only 10c, the open interest for the put side is only in the hundreds and has relatively low volumes. We would advise most investors to keep away from this since it is a complex investment vehicle that emulates daily returns only.
The winner is the FXE – the Currencyshares EURO trust. This ETF seeks to emulate the performance of the euro in usd terms. If the FXE rises that means that the Euro is strengthening and has more buying power compared to the USD.
Why is the FXE the ideal vehicle for option traders to speculate on the Italian debt crisis?
- The options on the FXE are highly liquid with open interest on both the call options and put options in the 1000’s.
- Daily volumes range from 100’s to 1000’s of contracts.
- The bid-ask spread is also extremely low (around 5c).
- The FXE trades now at $135.72, and has options at each dollar mark allowing good strike price flexibility.
While clearly trading FXE options involves trading general European sentiment, there is no good Italy-specific vehicle.
The next question is – what is your directional sentiment regarding the EURO and which specific option trades should we initiate?
We’d love to hear your comments and opinions regarding trading the Italian debt crisis and the FXE. Leave them below!
