How to trade a possible U.S. default??

While the hard deadline for a deal is Aug. 2, the closer we get to that date without a deal the more fear will become a factor in the markets. So how do you play this "default vs. no default" scenario?

If a deal is not struck, then we know a few things will probably happen:

• The Bond Market will be crushed.
• Bank stocks will be crushed (for the above reason)
• Volatility will shoot through the roof (usually an accurate measure of fear in the markets)
• S&P and DIJA will take a hit

Based on these outcomes, there are a few steps you can take to protect your portfolio from a possible market response to the debt dilemma.

1. Make a volatility play such as buying VXX . This is a S&P 500 VIX Futures ETN. Essentially, it is an ETN that gains in value as futures contracts on volatility become more valuable. Thus, as more and more fear of a default enters the market, there will be a premium on volatility causing this ETN to gain in value.
2. Open up far out of the money PUT options on an S&P ETF like SPY . The option will be cheap if you go far enough out of the money and will be sure to gain value in the case of a default (as we would see a huge hit to the S&P 500.)
3. Short bank stocks. These will be the companies most vulnerable to a bond market crash, and there will be a lot of negative trading action on banks stocks in the case of a default.