How to Trade a Greek Default

A new a day, a new headline for Greece. Today, reports are floating around the market that a Greek debt deal continues to inch closer. The European Central Bank is reportedly willing to take a haircut on its Greek debt holdings. Yet, given the general trend in the way events have transpired, investors may come to believe that a Greek default is all but assured at this point. In that event, traders may look to play the

in a number of ways.

European financials remain under the protection of a short-selling ban. Thus, this trade could manifest itself in the form of a proxy trade on US financials or other financials around the world. This was theorized to be behind the movement in US financials last summer. Financials have rallied strongly to begin the year, perhaps shaking off that trading thesis. If a credit event

, US financials could come under fire once more; perhaps getting that major pullback the market has been looking for. Still, if a Greek default is well managed, value investors could look to get into these stocks as aggressive speculative short selling could send them lower than fair value.

The euro is the clear trade here. Whenever speculation has risen that Greece would soon default, the currency has sold off. Inversely, when traders have come to believe that the European situation was on the path to resolution, the euro has rallied. Following this pattern, traders should expect that a Greek default would send the currency trading down. However, this could be a rapid move in either direction, and traders who get in too early could be run over if the situation develops in an unexpected fashion. Other currencies can also be traded in a Greek default. For example, the US dollar and Japanese yen could be anticipated to rally. If a Greek default is interpreted as a deflationary event, commodity prices could take a hit and that could lead to a sharp selloff in commodity currencies like the Canadian and Australian dollars.

Commodities could move in the event of a Greek default. Industrial commodities like oil and copper could sell off on expectations of deflation and recession. Precious metals may initially trade lower but then rebound if central banks like the ECB or Federal Reserve intervene to keep the economy moving along. On Wednesday, Standard & Poor's Gill stated that current expectations are for an orderly default. In that instance, the market may have little volatility, as market participants already consider such a scenario to be "priced-in." Yet, has an event such a sovereign default ever been orderly?