To keep our analysis simple, we will tackle two main views on the current Cyprus situation. The first says that the Cyprus situation is a harbinger of more bad news to come that will negatively impact risky assets in both Europe and the US with particular losses in the Euro currency against the US dollar. The other view is somewhat contrary to the first and posits that Cyprus is too small to matter on a global scale and any drop in stocks or even the EUR/USD are good buying opportunities.

The bearish narrative says that:

• European stocks will decline and so will US stocks in sympathy.
• Volatility will increase.
• EUR/USD will drop as investors sell Euros.
• Perceived risk-free assets will go up as investors plow money into US treasury bonds as well as German Bunds.
• Demand for gold as a safe haven bet will increase pushing the price of the yellow metal upward.

Such macro plays have been traditionally hard for retail investors to participate in but with the prevalence of ETFs there is an exchange traded fund for pretty much any theme you can think of.

Below are some of our editor’s picks:

For European Stocks ETFs:

Note that there is no Cypress ETF that you can trade but below are some other ETFs based on European stocks linked in some way to the crisis in Cyprus.
Global X FTSE Greece 20 (GREK)
Market Vectors Russia ETF (RSX)
iShares MSCI Italy Index Fund (EWI)
iShares MSCI Spain Index Fund (EWP)

Volatility ETFs

iPath S&P 500 VIX Short-Term Futures ETN (VXX)
VelocityShares Daily 2X VIX Short-Term ETN (TVIX)

EUR/USD currency ETFs

CurrencyShares Euro Trust (FXE)
ProShares Ultra 2x Long Euro (ULE)
Market Vectors Double Long Euro ETN (URR)
ProShares Short Euro ETF ( EUFX )
Market Vectors Double Short Euro ETN (DRR)

US Treasury Bonds and German Bunds ETFs

Long Treasuries – iShares Barclays 20+ Year Treasury Bond ETF (TLT)
Short (bearish) Treasuries – ProShares UltraShort 20+ Year Treasury (TBT)
PIMCO Germany Bond Index ETF (BUND)
PowerShares DB German Bund Futures ETN (BUNL)

Gold ETFs

SPDR Gold Shares (GLD)
ProShares 2x Long Ultra Gold ETF (UGL)
PowerShares DB Gold Short ETN (DGZ)
PowerShares DB Gold Double Short ETN (DZZ)

Motorola Mobility (NYSE:MMI) and Google (NASDAQ:GOOG) entered into a definitive agreement in August of last year whereby Google agreed to acquire Motorola for $40 a share or $12.5 Billion. At the time, this represented a 60%+ premium to Motorola’s closing price the previous trading day. As a value investor, I was fortunate to have owned Motorola shares in client accounts before the merger was announced. Knowing that the acquirer was Google, I was pretty assured that the deal will promptly close by the end of 2011 or early 2012 as had been announced since Google had all the financial resources needed to close the deal. However, the deal had to be cleared by Anti Trust regulators in both the US and the European Union. When in late September the Anti Trust Division of the US Department of Justice sent both companies a request for more information I, along with many investors, deemed it a routine request and that the merger will be cleared by the DOJ. Then in early December, the European anti-trust review process was suspended as regulators requested more data as well. Investors grew more wary and Motorola’s stock was trading below $38 in early January. This is pretty important as the difference between the price Motorola shares were trading at and the merger price, known as the arbitrage spread, was rather large for a merger expected to close within 30 days.

It seems that both the DOJ and EU are about to submit their verdict as soon as next Monday according to the Wall Street Journal. Now I have no particular insights as to how the decision will go but there are basically 3 decisions that each regulatory body can take: Approve the merger, deny the merger, or submit a mixed verdict such as a partial approval if certain actions are taken. For all of you math geeks out there, this means that there are 9 different outcomes and they are listed below.

To reach the merger Promised Land, outcome 1 above needs to happen which means that there is a meeting of the minds between the two regulatory bodies. It can very well happen but there is a chance, however slim, that it might not. Google has been making efforts to allay fears that it will not fairly license the vast trove of Motorola patents to competitors. This may do the trick – but then again it may not be enough.

Motorola’s stock closed at $39.35 on Thursday, 1.6% below the $40 merger price. If the merger indeed gets approved then you will likely earn that extra 1.6% by the end of February when the merger closes – if you currently own the stock. However, if any outcome above other than outcome 1 is rendered next week then Motorola’s stock is likely to lose more than 1.6% – a lot more probably. If you own the shares, look at the February $38 and $39 Motorola Put Options (which expire on February 17). You can buy insurance at $0.10 a share and protect yourself from a much bigger downside in case the deal is not approved or delayed. If you don’t own the shares, then looking at those same Put option will give you exposure to a real grey swan trade that can payoff very big but will cost you little.

Disclosures: I no longer own Motorola shares but I maintain a miniscule exposure in Motorola Put options.

Borrowing from the bestselling book by Nassim Nicholas Taleb, a Grey Swan trade is a trade that is based on a low probability event but has a huge asymmetric return if the event does indeed take place. While losses on many individual positions are often likely for these types of trades, the potential returns from the few that are profitable should more than compensate for the losing ones. While stock or index Options are often the type of investments that exhibit highly asymmetric returns, in some cases individual stocks can exhibit such a payoff structure.

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