Master speculator George Soros’ most famous trade was the one that “broke the Bank of England.”
That was when the British pound exited the European Exchange Rate mechanism in September 1992.
Soros reportedly made $1 billion that day after encouraging his then-CIO Stan Druckenmiller to leverage up the trade, famously telling him, “It takes courage to be a pig.”
Today’s Greek drama offers George Soros and other hard-nosed speculators a similar opportunity.
Why Greece is the World’s #1 Trading Opportunity
Traders love volatility. Without volatility, there are no profits.
That makes the “will they or won’t they” dynamic of Greece’s potential exit from the euro ideal for traders.
After all, it’s hardest to make money — whether on the long or short side — if the market is locked in a trading range, as U.S. markets have been for much of 2015.
Pundits have been predicting the collapse of the euro zone for years, whether Greece exits the common currency or not.
Back in November 2011, Financial Times’ Wolfgang Munchau predicted that the euro zone was less than 10 days from collapse.
In stark contrast, traders are remarkably complacent about today’s Greek drama.
And what a drama it has been…
Last week, Greek Prime Minister Tsipras met with Vladimir Putin in hopes that Russia would be able to bail out Greece, thereby threatening Europe’s unified stance on the European Union sanctions against Russia.
Going into this past weekend, a collapse of the Greek banking system seemed imminent.
Today, European officials are optimistic that a deal to avoid a Greek default is probable.
As the French say, “plus ça change, plus c’est la même chose.”
“The more things change, the more they stay the same.”
That said, all the “good news, bad news” days around Greece make it rife with opportunity with short-term profits for nimble traders.
How to Profit from a ‘Grexit’
- ProShares UltraShort Euro (EUO)
Certainly, Greece’s exit from the euro zone would hit the European currency hard.
If you can trade currencies directly, you can leverage your bets by as much as 20-to-1.
That means a 5% drop in the euro, say, from 1.14 to the U.S. dollar to 1.08, would double your money.
This kind of leverage was the secret behind how George Soros made his $1 billion when he bet against the British pound in 1992.
If you cannot trade currencies directly, the best way to profit from a sharp drop in the euro is a double short bet against the euro through the ProShares UltraShort Euro (EUO).
Although not as leveraged as a direct currency trade, a 5% drop in the euro would net you a quick 10% gain.
How to Profit from a Greek Bailout
- Global X FTSE Greece 20 ETF (GREK)
This Greek exchange-traded fund (ETF), a broad-based play on the Greek stock market, soared 8.7% yesterday on the initial signs of a breakthrough in Greece’s debt talks with its creditors.
The health of Greek bank stocks reflects much of the financial condition in the country. As it happens, GREK is chock full of bank stocks, which will live or die based on the outcome of the latest bailout talks.
Greek banking stocks have taken a dive in 2015, with some falling almost 80%. But they also rallied almost 20% just yesterday on the prospects of the latest lifeline.
From an investment standpoint, think of GREK like an option. Like an option, GREK is volatile. But it has the advantage of an uncertain expiration date.
Not a Game For the Faint Hearted
Of course, I don’t know if George Soros actually has any skin in the game in Greece.
But I know that many other hedge funds have bet big on a successful turnaround in Greece, expecting that it would follow in the tracks of Ireland and its successful recovery.
But it has been rough going for these hearty contrarians.
Wilbur Ross’ bet on the Bank of Ireland (IRE) more than tripled before he sold out.
But his bet on Greece’s third-largest bank is facing serious headwinds. Eurobank shares have fallen from about 40 cents in April 2014, when Ross invested, to about 13 cents today.
So, yes, as George Soros observed, “it takes courage to be a pig.”
But you also need to be right.
In case you missed it, I encourage you to read the e-letter column from last week about the market’s newest red-hot tech sector. I also invite you to comment in the space provided below my commentary.