Greek Shorts Ascendant in Hedge Against Syriza Victory: Options

By Inyoung Hwang and Jonathan Morgan  

Photographer: Aris Messinis/AFP/Getty Images

Alexis Tsipras, Main opposition leftist Syriza party leader, attends the second round... Read More

Only Russia has delivered a worse return than Greece for stock investors this year, and traders are showing little faith the equity market in Athens will rebound any time soon.
Bearish bets on an exchange-traded fund tracking Greek shares climbed this month to the highest level since May 2012, just before the benchmark ASE Index fell to a low in the wake of the nation’s debt restructuring. The measure is down 34 percent this year, the biggest decline after Russia’s dollar-denominated RTS Index, while intraday swings in the ASE have been the wildest in 2 1/2 years this month. The gauge sank as much as 11 percent today.
Prime Minister Antonis Samaras failed for a third time to get enough votes to back his presidential candidate, Stavros Dimas. Now parliament will be dissolved and general elections called, raising concern that the winner will be anti-austerity party Syriza, which seeks to
renegotiate the nation’s debt. Such an outcome could put at risk the European Union’s common currency and the start of the European Central Bank’s bond-buying plan.
“I wouldn’t say it’s a time to jump into Greek stocks,” said Francois Savary, chief investment officer of Reyl & Cie. in Geneva. “The last two months have shown we’re in a new volatility regime.”
Samaras failed to get a majority of 180 votes to elect his nominee after two unsuccessful attempts on Dec. 17 and Dec. 23.

Syriza Leading

Syriza, whose leader is Alexis Tsipras, has been leading polls, including the Rass survey published on Dec. 21.
Greece’s latest political turmoil comes amid a rebound in European equities fueled by speculation the ECB will push ahead with broader stimulus measures. The Governing Council expects to consider a proposal for broad-based asset purchases including sovereign debt at the next monetary-policy meeting on Jan. 22, two euro-area central-bank officials familiar with the deliberations said this month.
That’s helped send the Stoxx Europe 600 Index up 11 percent from this year’s low in October through last week.
Greece’s looming vote has affected volatility across the region. The VStoxx Index, which measures expectations for Euro Stoxx 50 Index swings, has jumped 44 percent this month, the most since October 2008.

38% Plunge

After climbing to an almost three-year high in March amid optimism about the nation’s economic recovery, the ASE has tumbled 44 percent. This year’s decline is a reversal from 2013 and 2012, when the index jumped more than 28 percent after Greece completed the biggest sovereign-debt restructuring in history and the nation pushed ahead with spending cuts.
Samaras, 63, pulled Greece out of a six-year recession and is on track to achieve the first balanced budget in more than four decades. Now the prime minister says that a change of government would endanger the incipient recovery.
Short interest on the Global X FTSE Greece 20 ETF (GREK) has risen to 18 percent of shares outstanding and reached 20 percent on Dec. 17, the day the nation held the first of its three votes, according to Markit data. In a short sale, traders sell borrowed stock in bets that the price will fall and buy it back at a lower price later, pocketing the difference.
Investors have also pulled money out of that ETF for a fifth month. That’s the longest streak since its 2011 inception, data compiled by Bloomberg show.

Trading Surge

At the same time, volume of ASE shares has jumped to a record 98.3 million this quarter and has become more than double that of equities in Switzerland, the fourth-biggest stock market in Europe.
Even with Dimas not winning today’s vote, the risk of contagion to European equities is limited as the economic recovery in other peripheral countries from the region is underway, according to Raimund Saxinger, who helps oversee $22 billion as a fund manager at Frankfurt-Trust Investment GmbH.
“For things to go wrong in Greece the following chain of events has to happen: The third round of the presidential election has to fail, the radical opposition has to win the next general elections to an extent that they form a government, and they have to follow through on their rhetoric, rather than softening their stance in the face of reality,” Saxinger said. “Having said that, even in that case there is little contagion risk for the rest of Europe.”
Since the ASE started its slump, the Stoxx 600 has gained 4.5 percent and reached an almost seven-year high on Dec. 5.
Now the Greek index is heading for an eighth monthly decline in nine. It sank 20 percent in the week ended Dec. 12, the most since 1987, as Samaras said the government would start the process of electing a new president early. Greece’s next general election isn’t due until 2016.
“This really underscores how Greece is still in a fragile situation economically and politically,” said Michael Block, the chief equity strategist at Rhino Trading Partners LLC in New York. “Markets aren’t worried enough. The market’s waving off here tail risks like the possible Greek exit post an election.”