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I know this is unlikely, but the future of the EU looks bleak. The Coronavirus shattered the European states, making some override the Schengen Area rules and enforce cross-border checks.

I'm looking for a product that is inversely correlated to a EU downfall. Ideally, a trade on which I lose a little if nothing happens, but brings me assymetric returns if I'm right.

I found the following ETFs:

I could buy put options on the former or just buy the latter, which changes its price by 2% when there's a 1% relative exchange rate change in USD/EUR.

What else could I use? Is there any other product with similar risks but higher potential payoffs?

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  • anything that EU buys as union and therefore bargained a smaller price that will spike when the union dissolve and price will be negotioated be each country separatelly? See UK-India Apr 15 '20 at 14:16
  • How do you suppose the EU is going to collapse? With a loud bang or just through a gradual erosion of rules and cooperation (as is already happening, as you correctly note)? Either way, the main result is going to be an adverse effect on its member states' economies, especially those that especially benefited from the single market (Ireland, Netherlands, Germany…)
    – Relaxed
    Apr 15 '20 at 15:12
  • To quote a renowned author on the topic of unpredictable events, history jumps, it doesn't crawl. So a sudden crash is more likely than a gradual erosion of unity. Apr 15 '20 at 15:23
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The further 'out of the money' a put option is, the cheaper it will be (because the price of something is less likely to change by a larger amount). So if you are truly looking to hedge a severe price change, you could use the same amount of money to buy far more put options if you priced them, say, an extra 5% out of the money from where they are today.

Depending on the product, moving the strike price further out by that much might drop the price in half, or even by 90%+. If the option price dropped by 90%, you could buy 10x the amount with the same capital. The return you receive for further price drops beyond that price would be magnified 10x. Note: In its most extreme form, this gets really close to gambling - you might have a 95% chance of walking away with nothing, vs a 5% chance of getting a 15x return. Be careful that you don't get too caught up in this form of extreme 'trading', because it looks less like investing than it does a trip to the casino.

Whether you take those put options on a currency product, or something else, the principle for this tactic will be the same: your at-risk amount is known in advance and limited to the cost of your put options, and the payoff gets larger (but less likely) the further away your strike price is from the current price.

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Worried about the financial stability of the EU ? Hedge the currency or short the banks. But the EU just passed a large economic stimulus. The positive aspect is that they have response. Well, if all major currencies are being diluted with deficit spending for stimulus then consider investing in gold.

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