Surprise: It’s Time to Buy This Dreaded Country
- The country’s benchmark stock index is 85% below its all-time high.
- Its stocks just flashed a buy signal.
- Investors can use a low-risk strategy to make gains of 113% or more.
It seems like every region in the world is in crisis.
Asian crises include China and North Korea.
In Latin America, Mexico and Brazil raise concerns. The tragedy of Venezuela is impossible to describe.
Europe is in crisis after European Union elections were unexpectedly divisive.
While scrolling through charts of global stock markets with this news in mind, I was surprised by a series of buy signals.
Just the fact that buy signals were on any chart was a surprise. I was even more surprised when I saw which country had such a bullish chart.
The Buy Signal
Greece’s benchmark stock market index remains 85% below its all-time high. But the country’s stocks are now on a buy signal.
The Athens Stock Exchange Index is in the chart below. Stochastics and the moving average convergence/divergence (MACD) are below the index.
The chart shows Greek stocks moved up after last month’s European Union election. The incumbent far-left party lost to a center-right party. Analysts expect the balance of power to shift the same way in the Greek election when it’s held in July.
Greece still faces significant challenges. The country’s debt is among the highest in the world.
Economic growth remains slow, with gross domestic product growing just 1.9% in 2018. But that topped growth in France, Germany and Italy.
The country still has a long way to go to get back to where it was before the financial crisis. Average income is 21% below the level of 2008.
That slow economy means there are significant risks to investors. But a relatively simple trading strategy can limit risks.
A Low-Risk Way to Make Money
At the heart of this strategy is an exchange-traded fund (ETF), the Global X MSCI Greece ETF (NYSE: GREK).
With an ETF, investors buy a basket of stocks with a single investment. ETFs trade like stocks and carry the same risks as stocks.
Options are one way to limit risk. A call option allows investors to benefit from price gains, and you can never lose more than the cost of the option. For GREK, one option limits risk to less than $100.
The December 20 $9 call option is trading for about $0.90. Each contract covers 100 shares, so the total cost of the trade is $90, plus commissions (which are just a few dollars or even free at some brokers).
To understand the option, let’s compare it to the potential rewards and risks of owning 100 shares of GREK.
GREK is trading at about $9.10. Buying 100 shares would cost $910. If the ETF gains 20%, it would trade at $10.92. You would earn $182.
The $9 call would cost $90. If GREK gains 20% by December 20, this call would be worth at least $1.92.
That’s because the call gives you the right to buy GREK at $9. You could do that and immediately sell shares at the market price. If the market price was $10.92, you would get an instant profit of $1.92 on that transaction.
Considering that you paid $90 for the option, your trade results in a net gain of $102, a 113% gain.
In percentage terms, you could gain more than five times as much as the shareholder who buys 100 shares, with an investment that’s less than 10% of the amount required to buy 100 shares.
Consider Options Strategies
An additional benefit of buying options is the fact that buyers can never lose more than they pay to enter the trade. In this trade, that’s $90.
If GREK falls by 20%, the stock will trade at $7.28. That’s a loss of $182 for every 100 shares. The option could fall to $0 if that happens. That would mean a loss of $90.
Options always provide for limited risk like this. And there are other possible outcomes for this trade. The profit could be more than 113%, and the loss could be smaller than $90.
Options might not be the best strategy for all investors. But they can provide large gains. They also limit risk.
Because the gains can be so large and the risks can be well-defined, almost all investors should consider options strategies.
If you’d like to learn more about options, you can check out my Peak Velocity Trader service by clicking here.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader