Betting On More Pain For GREK With $9 Puts

Trader sees more problems ahead for Greece despite tentative deal.

Reviewed by: Scott Nations
Edited by: Scott Nations

This is a weekly column focusing on ETF options by Scott Nations, a proprietary trader and financial engineer with about 20 years of experience in options.

The people of Greece have had a difficult year, and the Global X FTSE Greece 20 (GREK | D-63) ETF has had a pretty tough time as well.

While Greece’s tentative deal with other eurozone countries means the fortunes of the Greek people might improve, at least one institutional option trader thinks there’s going to be more bad news for GREK.

GREK has lost 60 percent of its value over the past 17 months as the domestic Greek economy continues to weaken and as Greece’s eurozone partners tire of the Greek drama and push for austerity.

Many observers believe the recent deal means GREK has found a floor for the next several months as the dust settles. But one institutional option trader believes there’s lots of downside left, and he paid handsomely for the option position that will be profitable if he’s right, but that will define his risk if he’s wrong.

$9 Puts On GREK

On Tuesday, that trader bought 153 of the August $9 puts in GREK in what was the largest single trade of GREK put options for the day. GREK was trading at $10.47 this morning.

He paid $0.60 per share when these options were $0.50 bid and offered at $0.60, so he executed the trade very aggressively by simply paying the offer to get the trade executed rather than trying to pay something less, such as $0.55, and risk scaring off any potential sellers.

This execution strategy suggests this put buyer is very bearish on GREK.

Since each option corresponds to 100 shares of GREK, our trader paid a total of $9,180 for the right to sell 15,300 shares of GREK at $9 any time before the options expire on Aug. 21.

That premium paid—$0.60—is the maximum potential loss, but that’s also a pretty expensive option given that the $9 strike was 16 percent out of the money at the time he executed the trade.

GREK Options Pricey
As a comparison, options on GREK are more than eight times more expensive than options on the SPDR S&P 500 (SPY | A-99), which means traders expect a lot of volatility from GREK in the near future. Any options on GREK are going to be expensive.

If past is prologue, there’s a reason to expect that future volatility. Over the past two years, GREK has been five times more volatile than SPY, and there’s obviously plenty of reason to think that volatility will continue.

Institutional option traders will often buy a put spread rather than an outright put, as this trader did, in an effort to reduce the cost.

For example, this trader could have sold the $7 strike put at $0.15 and reduced the cost of the trade by 25 percent by turning his outright put position into a put spread. The likely reason he didn’t do so? He thinks GREK is headed below $7.

At the time of writing, the author didn’t own a position in GREK. Follow Scott on Twitter @ScottNations.

Scott Nations is president and CIO of NationsShares. NationsShares is a leading developer of domestic and international option-based and option-enhanced investment products. He is the creator of VolDex (ticker symbol: VOLI), an improved measure of option-implied volatility on SPY, the S&P ETF.