European Banks Destroyed! Here Is How To Trade It

While the U.S. banking sector is getting slammed on Monday, it is not quite as bad as what is happening over in Europe. Global financial markets are freaking out after bond spreads in Italy and other European countries blew out to start the week as the region's debt crisis, which started in Greece, appears to be spreading. Italy, in particular, is a major concern due to its size. As panicked bond investors dump sovereign paper in Europe, yields rise making it harder for governments to fund themselves. It is believed that private banks have considerable exposure to these bonds, and as such, investors are punishing their shares. Leading the way down is Deutsche Bank DB, which is having a truly bad day. The stock has plunged 5.57% and is now sitting at multi-month lows. The German bank's share price has fallen 14% over the last 52-weeks. Swiss bank UBS AG UBS has seen its share price tumble nearly 4% on the session and has broken through some significant support levels. The stock is still up around 3% in 2011. British based Barclays BCS is getting thumped to the tune of 5.38% and has lost 19% over the last 52-weeks and more than 9% year-to-date. Royal Bank of Scotland RBS is trading down 5% to $11.38 and is also hitting multi-month lows. Shares of Spanish bank Banco Santander STD are down 5.38% to $10.20 on very heavy volume on Monday. That stock has shed around 20% in the last month and more than 4% year-to-date. ACTION ITEMS:

Bullish:
Traders who believe that today's reaction to the news out of Italy is an overreaction might want to consider the following trades:

• Buying the iShares MSCI Italy Index ETF EWI. The fund is down 6.15% just today.

• Buying the CurrencyShares Euro Trust ETF FXE. The ETF, which tracks the performance of the Euro, is down 1.70% today. The EUR/USD pair is still trading above $1.40 support, and if it doesn't break, we could see a quick pop in the Euro.

• Buying a basket of European banking stocks. The moves today have been huge, and any type of positive reassessment should provide a nice bounce in the sector.

Bearish:
Traders who believe that this is just the start of a full blown panic in Europe may consider alternate positions, such as:

• Buying the ProShares UltraShort MSCI Europe ETF EPV. The fund is up 7.17% today and tracks double the inverse of the MSCI Europe Index.

• Buying VIX futures or an ETF that tracks the VIX, which has popped 16.49% today. If the situation in Europe comes unglued, the VIX will move much higher in short order.

• Shorting the EUR/USD pair. Some market analysts are now calling for a move to the $1.20s in the currency pair. Shorting the Euro is a very straightforward way to bet on a deterioration in the region's debt situation.

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