Analysis & Opinion

NEW YORK Jan 15 (Reuters) — Political turmoil in Greece has hit its financial markets hard, and traders in the U.S. options market are positioning for a further fall in Greek stocks as the country heads to a snap election that could determine whether it leaves the euro zone.

There are few choices for investors who want narrow exposure to Greece in U.S. markets, but one, the Global X FTSE Greece 20 exchange traded fund, which tracks the Greek equity market, has seen more active trading in the options market as traders position for more upheaval.

The ETF has fallen about 50 percent since early March 2014 and hit a two-year low of $12.05 on Jan. 8. Since December alone, the ETF has lost 20 percent, and daily put activity — bets on the market continuing to fall — has tripled in the last two weeks.

The country faces an early national election after its parliament rejected Prime Minister Antonis Samaras’ nominee for president on Dec. 29. Greece’s anti-bailout Syriza party holds a lead of 3.5 percentage points over Samaras’ conservative party, an opinion poll showed late on Monday.

Financial markets are nervous that a Syriza victory could trigger a standoff with EU/IMF lenders that results in Greece leaving the euro zone. The party has vowed to cancel austerity measures imposed to meet the conditions of Greece’s 240-billion-euro ($278 billion) bailout, and to renegotiate debt obligations.

In terms of valuations, it looks like the market is pricing in a very high likelihood of Grexit, JP Morgan analysts said in a note on Tuesday, referring to the country’s exit from the euro zone.

Traders in the U.S. options market are cautious and are using puts on the typically lightly-traded GREK fund to hedge against a further drop in the ETF.

Puts on the Greece ETF have been unusually active with average daily volume since Dec. 29 of about 3,200 contracts, about three times the average daily volume over the last 200 days.

Notable recent trades in the options on the ETF include 4,150 February puts at the $12 strike bought on Dec. 22, and 6,000 of them bought on Jan. 6. There was also significant activity in November when 20,000 March puts at the $15 strike were bought over two days.

The February and March put positions have been rolled to from puts in December and earlier months as traders have been betting against Greece for months now, said Joe Kunkle, founder of options analytics firm OptionsHawk.com in Boston.

And there is huge expectation for a large move in the ETF’s shares. The 30-day at-the-money implied volatility, a gauge of the risk of large moves in the ETF, is at 96 percent, or higher than 97 percent of readings in the last 52 weeks, according to options analytics firm Trade Alert.

Of course, with these declines, a brave investor could go in the other direction.

For an investor wanting a high-risk/potentially high-return trade, I would say going long Greek stocks makes sense, said Charles Sizemore, chief investment officer at Sizemore Capital Management.

If cooler heads prevail and Greece avoids a messy exit, Greek stocks are a bargain, he said. But this is also one of those trades where you could lose half your money in a hurry if political events slide out of control. (Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)