Greece and Germany appear to be playing a game of financial chicken. The question is whether that means stocks are set to get roasted.
Reuters, citing a source, reported Tuesday that Greece is set to run out of money by April 20 if it doesn't receive more financial aid.
A plan is on the table for the European Union to provide Greece with an infusion of euros, but German Chancellor Angela Merkel insists that Greece pledge to institute reforms before the money is handed over. A meeting Monday between Merkel and Greek Prime Minister Alexis Tspiras appeared to produce little in the way of tangible compromise.
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U.K. Chancellor of the Exchequer George Osborne said Tuesday that "ill-will" between Greece and the rest of the EU is raising the chances of Greece leaving the union.
"The key point to keep in mind here is that this has been an exercise in brinksmanship, and the brink (when Greece runs out of money) is approaching," said Brown Brothers Harriman global head of currency strategy Marc Chandler in a note Tuesday.
As the stakes rise, Greek bond yields do so, too, given that they price in greater and greater risk of a default. Greek 2-year bond yields have doubled in 2015.
What does it all mean for stock investors?
If the situation deteriorates, "then getting long volatility is a decent idea," said Larry McDonald, the head of U.S. strategy for Societe Generale's macro group.
"A lot of people are in positions that may not be liquid, especially in fixed income bonds. So if you are worried about a, say, 5 to 10 percent correction, just positioning some money in the VIX or an ETF that gets long the VIX can give you a nice bit of protection," McDonald said.
Stacey Gilbert, head of derivative strategy with Susquehanna, also likes the idea of putting on trades that profit as market volatility rises. But she would prefer buying put spreads to getting exposure to a volatility index like the VIX.
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Buying put spreads on the allows one to make a defined-risk bet that stocks will drop, protecting against a fall of a given magnitude within a given time.
A put spread "is going to give you some exposure in protecting your U.S. assets if, in fact, there is a pullback here," Gilbert said.
