It’s a rare moment in U.S. history, with financial markets expecting the months after a presidential election to be dangerously erratic.
Cboe Volatility Index’s
futures market indicates that investors are preparing for tumultuous financial and political conditions in November, December, and January. Until recently, investors had priced October as a month of great volatility, and the following months as less.
But concerns raised by President Donald Trump about potential problems with mail-in ballots are apparently persuading major investors to prepare for postelection chaos. They are buying VIX futures and options that would increase in value if the stock market declined, actions that have lifted the VIX futures curve and sent bearish tremors rippling into the stock and options markets.
“Investors are pricing in the chance that the election will be messy and contested, the results potentially delayed, and the outcome unacceptable to a large portion of the country,” says Steve Sosnick, Interactive Broker’s chief strategist.
The warning signs in the VIX derivatives complex began emerging about a week ago, and they now loom above the stock market like the sword of Damocles.
If Trump or his challenger, former Vice President Joe Biden, contests the election, stock prices would likely decline and the world would be thrust into a predicament.
Since America was founded, power has, with the exception of the Civil War, nearly always passed peacefully from one party to the other. Our generally stable ways have long set the standard for best political practices around the world. The 2020 election could be an exception.
Already, signs suggest that Americans are ready for almost anything. A backlash against police brutality has incited protests and riots in major cities. People are buying guns to protect themselves amid calls to defund the police. Incredibly, the Trump administration has declared New York City, Seattle, and Portland, Ore., to be “anarchist jurisdictions.” Meanwhile, the pandemic rages—and the list of woes could grow.
And yet, it’s worth remembering that even though the path ahead may prove volatile, corporate earnings will increase over time, stocks will follow, and derivatives volatility will revert to the mean. “Uncertainty will abate,” says Doug Kramer, Neuberger Berman’s co-head of quantitative and multi-asset class investments. Kramer’s observation is a worthy motto for investors at a time when the fabric of America appears to be fraying, even tearing.
In early September, when the
was about 8% higher and no one was interested in election hedging, we recommended buying S&P 500 puts. Now, an evolution is warranted. Rising anxiety arguably makes it more attractive to sell cash-secured puts to nervous investors. By doing so, investors can potentially profit by selling hedges to investors who will likely pay top dollar.
When the market again plummets so sharply that the end seems nigh, consider selling cash-secured puts that are 5% to 10% below the price of your favorite securities, and that expire in 30 to 45 days.
The strategy was popular earlier in the week in
(ticker: AAPL) shares and across the tech sector as stock prices fell. Chris Murphy, a Susquehanna Financial Group strategist, told clients that even if they “missed” the tech rise in August, they’ll get another chance now that prices are back at pre-August levels and implied volatility is higher. Those conditions are attractive for put sales on stocks that investors are willing to buy on a dip.
Until the appointed hour, the political commentariat will keep palavering about chaos, the rise of socialism, and the death of America. Financial pundits will weave that nonsense into a doom-and-gloom song. Meanwhile, tough, well-heeled investors will sell puts on blue-chip stocks they can hold until peace once more prevails.
Email: [email protected]