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European Stock Options
As the never ending Euro Zone debt dilemma continues, a word or two about European stock options seems in order. Technically, European stock options are a variety of stock option. A European style stock option is one that can only be exercised at the end of the contract period. Its value may rise or fall based upon expectations but one can only sell stock in the case of puts or buy stock in the case of calls at expiration. However, European stock options also refer to options on European stocks which are falling right now as Euro Zone anxiety continues. Group 8 leaders are meeting at Camp David in search solutions to a likely default on Greek debt. With no agreement reached on a coalition government the Greek people go back to vote in late June. Unfortunately that will be too late to institute the austerity measures that the former government agreed to in return for quarterly bailout infusions in the €30 Billion a month range. At the news of a likely Greek debt default stocks fell across Europe and a run on Greek banks has already started.
Of the various kinds of options trading European stock options are somewhat limiting. This is because the trader cannot execute the contract at any time during the contract period. American style stock options, on the other hand, offer this degree of flexibility. What is the difference if the options buyer can sell his contract whenever he wants? The problem is that the options contract may peak in value due to market events but that peak may not be sustained. Thus an options buyer must look to the end of the contract period to assess the market and likely final price of the underlying equity. Considering the volatility that the European and American markets may see during a worsened debt dilemma, traders may well choose American style instead of European stock options.
But, ignoring options style, European stock options, that is options on European stocks may be profitable in the coming weeks, months, and even years. While long term investors look for security options traders often seek chaos in the markets. This is the “blood in the streets” analogy of Baron von Rothschild. The time to buy is when there is blood in the streets. The time to sell is before everyone understands that there will soon be “blood in the streets.” Smart options traders will look at strong European companies and understand that they may be unfairly underpriced under current circumstances. This will offer an excellent options trading opportunity. The same options traders will also see the immense underlying risk that European banks face in light of a likely Greek debt default and domino effect across Southern Europe. In this sort of crisis options trading offers traders a means of hedging risk and a means of leveraging trading capital. Traders who purchase options never lose more than the price of a contract.
