Among the many benefits options provide traders is a vast array of strategic opportunities. No matter what your market perspective is, be it bullish or bearish, there’s a viable way to profit. In this blog, we will break down two options strategies designed to capitalize on the pricing volatility of the 2020 presidential election.
Using Out-of-the-Money Calls to Go Long U.S. Stocks
Going into the coronavirus (COVD-19) pandemic, the three-and-a-half-year “Trump Rally” in U.S. equities was in full swing. With the onset of COVID-19, however, the Dow Jones Industrial Average (DJIA), S&P 500, and NASDAQ fell by more than 30 percent in a matter of weeks. Although many investors were badly hurt, opportunistic traders looked to bullish options strategies to generate capital. One such strategy is buying out-of-the-money calls on equity index futures.
Here’s how this strategy works. For example, assume that Sam the S&P 500 trader believes that U.S. stocks are undervalued and that incumbent Donald Trump will win a second term in office. If Sam is right, extended corporate tax cuts and a resolution to the U.S.-China trade war may fuel a strong post-Election Day rally in domestic equities. To get in on the action, Sam buys out-of-the-money E-mini S&P 500 calls:
- On April 1 2020, Sam purchases five March 2021 E-mini S&P 500 calls with a strike price of $3,000.00. The premium is paid up front, and the position goes live.
- If March 2021 E-mini S&P 500 futures rally above Sam’s breakeven point (strike price + premium), a profit is realized from every uptick in price.
Theoretically, strategies that involve buying out-of-the-money options contracts may generate unlimited returns. In addition, the only assumed financial liability is that of the premium. If the S&P 500 trends higher before or after the November election, Sam may be in a position to reap the rewards.
Projecting Safe-Haven Tops with At-the-Money Puts
The beauty of futures and options is that for every bullish opportunity, there’s a bearish one. While Sam may be excited about the upside potential of the S&P 500, his feeling about gold may be very different.
To benefit from falling bullion prices, Sam can implement options strategies involving the purchase of at-the-money puts. Buying at-the-money puts may give Sam a chance at large profits if gold is at or near an intermediate-term top upon entry.
Here is a scenario in which Sam may be able to cash in on a post-Election Day slump in gold:
- During the run-up to the election, investors may decide to seek protection from an uncertain outcome. Let’s say that they do, and Dec. 2020 gold futures post mid-October all-time highs at $1,725.00 per ounce. Accordingly, Sam purchases five put options of Dec. 2020 gold with a strike of $1,725.00.
- If price falls beneath Sam’s breakeven point (strike-premium), profits will be realized on a per-tick basis.
The outcome of the 2020 election will be a key driver of Sam’s success in both the bullish and bearish options strategies. If the pro-business Trump administration stays in the White House, equities are likely to show strength in the post-election months. In addition, institutional investors may be inclined to reduce safe-haven holdings following the election’s uncertainty lifting.
On the other hand, a fresh administration will bring a multitude of questions. New economic, social, and legislative agendas could muddy the investment waters for a considerable period of time. Gold values may rise while equities stagnate or fall.
Using Options Strategies to Profit from Election Volatility
It is important to remember that options strategies are nuanced―understanding how premiums, market volatility, and time factor into profitability can be a challenge. Sometimes, seeking the advice of a seasoned professional is the best course of action.
A great way to begin your options trading career is by working with a licensed broker at Daniels Trading. Our team of brokers has the experience and expertise needed to successfully navigate the 2020 election cycle. For more information on our broker-assisted service suite, contact a member of the Daniels Trading team today.
