Extreme Volatility Expected Around the Greek Election
As most of you already know, this weekend will be crucial for the Greek as they are going to vote for the second time in a new attempt to elect a government.
Looking at the latest polls, there is a close race between the leftist Syriza and the New Democracy parties as the Greek are divided between staying in the Euro and avoiding more austerity measures. To complicate things even more, it is likely that no matter who wins, it will be difficult to make deals between parties to form a government.
Letting politics aside, we are concerned with spread betters because of increased volatility that will certainly occur. At most spread betting and forex providers, markets open at Sunday night. With the Greek election going underway, markets can open with a significant gap. If that is the case, even if you set a stop loss, you won’t be able to close your positions at the desired price. If volatility is extreme, the difference between the stop and the real closing price may be so large that the funds in your account are not sufficient to cover the losses.
Besides the market gap risk, there is a risk of extreme volatility occurring during all Sunday night until Monday morning. As you may be aware, no one will have final results at the first hours of Sunday night and speculation will occur. Any piece of information will certainly cause extreme variation in Euro pairs and, to a less extent, in equity indices. That means that speculating in the result will be a tough game to play, and markets will certainly go up and down like a yo-yo. Although you may guess the final result you can be caught by a stop order or a margin call before you imagined. The path to the final result will certainly be tortuous.
Another problem to account for respects the widening of spreads during the night. Banks and other liquidity providers may widen their spreads to protect themselves against unfavourable moves or even suspend trading completely for some time. You should be prepared for this situation. If your spread betting provider suspends trading, you may be caught off guard with a position that you are not able to close, or if spreads widen too much you may end with a margin call.
For all the stated above, we recommend all spread betters to either reduce exposition or close positions until 21.00 today. In the particular case of EUR/USD, the risk is of keeping holdings overnight is extreme. In the case of the major indices like the Dax, the FTSE, the Dow, and some other, the risk is also elevated. If you have any doubts about the risk you are incurring or about how your spread betting provider will react, save your money and close all positions.
You do have alternatives that are less risky, but can be costly:
- Buy a guaranteed stop. That will give you peace of mind but can cost you too much to be worth it;
- Trade options on the Euro, the FTSE, or the Dow. Depending on your prospects you can buy a call or a put. The biggest advantage is that your maximum loss is know with certainty. You can trade options at IG Index, for example.
The timeline depicted below can serve as a guide for the night:
- Sunday, 19:00 – 21:00 – The first exit polls will be announced;
- Sunday, 21:00 – Official results will start to come out. It is expected that around midnight, 10 to 15% of the votes will have been counted, but may be still too soon to know the final result and volatility can create a yo-yo effect in markets;
- Monday, early in the morning – Final results will be known;
- Monday, late in the afternoon – According to the constitution of Greece, the Greek President, Karolos Papoulias, will ask the leading party to form a government. Depending on the election result this will take more or less time. As we have seen, the last election led nowhere and a new election was called.
For more information about this particular election you can use Wikipedia. Just as a final note, please have in mind that the Greek parliament has 300 seats in total. The winning party earns a bonus of 50 seats, while the remaining 250 are distributed proportionally.