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It appears the European debt crisis is continuing to get worse, making being long in the U.S. stock market seem increasingly tenuous. If one were instead to choose/embrace the notion, "it's going to get worse in Europe", how would one best trade that? What are some of the ways?

Two I can think of is:

  • buy longer term puts on the major stock indices, e.g. on S&P 500

  • use mechanism X to buy the dollar against the Euro (which mechanism is good)?

Others?

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Short the Pound and other English financial items. Because the English economy is tied to the EU, it will be hit as well. You might prefer this over Euro denominated investments, since it's not exactly clear who your counterpart is if the Euro really crashes hard. Meaning suppose you have a short position Euro's versus dollars, but the clearing house is taken down by the crash.

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    however, I'm not taking my own advice, so I must insist you ignore it as well. :) – Knox Nov 27 '11 at 13:28
  • Interesting idea Knox. Things tend to fail slowly though, so do you think you might get stuck not being to buy back ... perhaps that's perfect though? I haven't looked at Forex in a while, but if one is indeed shorting it, is it okay if it evaporates? I.e. do you receive the money first, and then have to buy it back, or is the initial trade a net outlay when one shorts the EUR/USD? – Ray K Nov 28 '11 at 6:51
  • @Knox - I expect that England will pull out of the Eurozone and the EU before it takes to terrible of a hit. If it does then a slingshot effect could be painful on someone short on the pound. (All speculation no inside information just my prediction for the last year though I have seen nothing to change my prediction.) – user4127 Nov 28 '11 at 14:28
  • I think that England is lucky to not to be tied to the Euro. However, i think it will be hit not because it belongs to the EU, but rather because it does a tremendous amount of trade with the continent. I expect that will plunge as they sort things out. We're looking at lost decade here. – Knox Nov 28 '11 at 15:20
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The way I am trading this is: I am long the USD / EUR in cash. I also hold USD / EUR futures, which are traded on the Globex exchange.

I am long US equities which have a low exposure to Europe and China (as I expect China to growth significantly slower if the European weakens).

I would not short US equities because Europe-based investors (like me) are buying comparatively "safe" US equities to reduce their EUR exposure.

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