Why I think the euro has one year left

The collapse of Europe's single currency is inevitable, says Bengt Saelensminde. Here, he outlines a simple trade to profit from the breakup of the euro.

How long do you think the euro can survive? How long before the Greeks or the Italians say "screw this we're out of here"? I'm sure you have an opinion. Everyone I speak to seems to have one.

In fact, spread betting dealer Worldspreads is even taking bets on the euro breakup. According to them, there's less than a year to go before the first member leaves.

Do you think you know better? Well, here's your chance to put your money where your mouth is.

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I've been looking for a way to have a punt on a euro breakup. I've pointed to a number of trades in Right Side in the past including shorting banks and the FTSE.

And I think betting on the euro breakup through Worldspreads could be another interesting trade.

Here's how it works

When it comes to getting exposure to a share, a spreadbet is pretty easy to grasp. The quote offered by the spread-bet company (let's call him the bookie from now on) is based on the market price, plus a financing charge to take account of the leverage he offers. The quote also takes into consideration any dividends the stock pays and normal market spreads. Brush up on the basics of spread betting here.

But how can a bookie offer a price on how many days before the euro cracks up? Well here's how it works

Worldspreads is giving a mid-price of 700 days until the euro, as we know it, breaks up.

What does 700 days mean? Well, for a bet like this there has to be a reference point. In this case it's 1 January this year. That's when the bet was first offered. This quote is saying that 700 days from the beginning of this year is when one nation will either voluntarily leave, or will get kicked out.

700 days works out as 11 December next year - near as damn it a year from now.

And what constitutes a breakup? Well, according to this bookie it's when "...the first current constituent country in the eurozone withdraws or is expelled from the zone. The make-up date is defined as the day the government in question surrenders or loses its right to vote in the Governing Council of the European Central Bank."

The actual quote is 695-705. That's 705 days if you want to buy (go long) and 695 days if you want to sell (ie you think the breakup will be sooner).

That means if you think a member will leave the eurozone in less than a year, you can sell the 'euro-breakup' at 695.

Say you put on £10 per point, here's what could happen

Here's what could happen

If all hell breaks loose and Greece bails out of the euro on New Year's day, that'll be one year (365 days) from when the quote was opened. Your profit would therefore be 695-365=330 points. At £10 per point, you'll get £3,300.

The bet is offered for a maximum of 1,000 days. So if no country has left the euro by 27 September 2013, then the bet will automatically close out. Perhaps they'll then 'roll-over' the bet and re-open it again for another 1,000 days at that point we don't know.

That means that if you're wrong and the project hangs together until September 2013 (1,000 days from the reference date) you'll lose £3,050 at £10 a point, ie 1,000-695=305 points multiplied by £10 a point.

So if you reckon nobody's going to leave the euro project over the next couple of years, you can go 'long' the quote. You buy at 705 days and will earn a profit for every day the project hangs together beyond 705 days from the reference date. To break even the euro has to hang together for about a year.... every day after that will be £10 earned on the bet.

So if you're right, you'll win 1,000-705=295 points come September 2013. At £10 per point, you'd be looking at £2,950.

Worth a punt?

I reckon the euro will eventually break up. But the guys at the top are going to cling on for dear life for as long as they can. It's going to take time to put into position an exit strategy for any member that wants to leave. After all, they're not even considering an exit yet. A year from today sounds about right to me.

Of course a nasty unplanned break-up could ensue much sooner. If you believe that, go short. I'll leave the bet up to you.

Remember too that with a spreadbet you won't be asked to put down the whole amount of cash you've put at risk. That means, if your bet goes sour, then you're likely to be on the hook for more money than you've put into the account.

My advice is to work out your exposure before you open a position. Always consider the worst case scenario and how much you'll lose if it comes to it. Remember, even if you're right, the market can still move against you in the short run. There's nothing worse than being closed out of a position because of short-term volatility so if you do decide to open a position, make sure you've put down enough money to ride out any storms.

If this doesn't interest you, it's worth tracking the bets on Worldspreads anyway. It's interesting to see where the speculators are putting their money. Despite what the guys in Brussels say, the euro is likely to disintegrate. One year from today is where the smart money's at. And I agree.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

Important Information

Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.

Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.

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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.

 

He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.

 

Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.

 

Bengt also writes our free email, The Right Side, an aid for free-thinkers on how to make money across financial markets.