Daniels Trading is nonpartisan and does not endorse political candidates. The purpose of this blog post is to provide objective, unbiased information on what we believe could happen in the markets depending on the outcome of the election or how the election may impact the markets. The content is not intended to convey a preference or state a position in support of any candidate, and the sentiments expressed do not necessarily reflect the viewpoints of our team members.
The 2020 U.S. election will go down in history as one of the most anticipated political contests in modern history. Featuring a slew of toss-up congressional races and a heated battle for the presidency, the 2020 election will be a catalyst for heavy participation and volatility in the capital markets.
If you’re a futures trading aficionado, then buckle up―the periods before, during, and after Election Day promise to be action-packed. In this blog post, we’ll take a look at how you can prepare for the volatility and maximize your election season performance.
Tip No. 1: Understand When Volatility Can Strike
For futures traders, volatility drives both risk and opportunity. Throughout the electoral cycle, key events such as primary season, party conventions, and debates all influence public opinion regarding November’s potential victors. In turn, pricing volatility picks up in asset classes across the board, creating futures trading opportunities and pitfalls. To profit from the turbulence, it’s critical to have a plan in place that can address trade selection, risk, and reward as the action unfolds.
A solid election trading plan needs to account for the following potentially volatile periods:
- Election eve: Price action during the Monday before Election Day can be slow. Nonetheless, a late swing in polling data or an external news item can sway the markets going into Election Day.
- Election Day: Election Day is littered with news stories, predictions, and exit polls. A word to the wise: Be aware of exit polls! Although the data isn’t always correct, it can bring sudden volatility to the futures markets.
- Election night: When voter polls close, expect an onslaught of market volatility. Remember, media outlets often call states immediately after the polls officially close. Although 2020 may be unique because of mail-in voting, be especially aware of when the polls facing key races and battleground states close.
Each of these periods is susceptible to extreme swings in asset pricing. As an example, the 2016 presidential election brought major volatility to U.S. equity index futures. Following the concession speech of Democratic candidate Hillary Clinton to Republican Donald Trump, S&P 500 and NASDAQ 100 futures plunged more than 5 percent.
For traders who were net-short U.S. stock futures, the evening of Nov. 8, 2016 produced extraordinary returns; for those net-long, Trump’s upset victory caused major short-term drawdowns. In both cases, it paid to be aware of key Election Day periods. Events such as exit polls, poll closings, and concession speeches can bring instant action to currency, commodity, debt, and equity futures.
Tip No. 2: Expect the Unexpected
Perhaps the greatest futures trading lesson to take from Trump’s 2016 victory is this: Anything is possible. As late as election night, the New York Times estimated that Hillary Clinton had an 85 percent chance of winning the White House. This was a popular view because Trump was a decided underdog in most battleground states. However, as the voting polls closed, a much different result came to pass.
The 2020 election is shaping up to be a similar scenario. As Election Day approached, the pollsters at Fivethirtyeight.com assigned Democratic challenger Joe Biden more than an 80 percent chance of winning the election. Real Clear Politics polling data supported this assertion, showing that Biden led by an average of 7.9 percent nationally and 4.1 percent in key battleground states. From a polling standpoint, 2016 and 2020 seem alike in many ways.
So, can we expect the same result in 2020 as we had in 2016? Ultimately, the answer to that question is anyone’s guess. However, there are ways to capitalize on the uncertainty via futures and options. Here are two basic strategies that can produce big winners with minimal risk:
- Straddle: Locking in a straddle on the E-mini S&P 500, E-mini NASDAQ, or E-mini DOW ahead of Election Day can pay big dividends. Other viable targets for this strategy are the Euro FX, crude oil, and gold futures.
- Buy out-of-the-money (OTM) puts/calls: Although not a popular strategy among professional traders, buying OTM puts/calls is a cheap way to cash in on an extreme bullish or bearish market move.
- Trade reduced sizes: Trading Micro E-mini equity index futures or the Smalls enhances your staying power in the market. If you see the market in a bearish or bullish light, you may be able to limit risk while anticipating a large, directional move in price.
The key to making these trade ideas work for you is to minimize your risk exposure and manage leverage aggressively. If lightning strikes and market volatility goes crazy, any of these futures trading strategies can produce extraordinary gains.
Interested in More Futures Trading Tips Ahead of Election Day?
The above tips are a good place to begin preparing for election trading. However, there’s much more to know and many other factors to consider. To get up to speed on trading during the 2020 election, schedule your free one-on-one consultation with a Daniels Trading broker today.