Tuesday’s election is being viewed as possibly the most impactful mid-term vote in decades. Many consider its referendum on the direction that the U.S. will take social, economic and foreign policy issues.
The stock market seems to be bracing for results — much like the way that investors await earnings releases for specific companies.
I think we can set up a trade to profit from the election as we would from an earnings report.
Indeed, if we look back on prior pivotal votes such as Brexit, and the last presidential election, we can see that the options market behaved similarly to an earnings release; implied volatility rose dramatically heading into the events and then dropped following the results.
We now have two pieces of the puzzle; we expect a decline in implied volatility and for the market to move higher in coming weeks.
A strategy that would benefit from such a scenario is a ratio call spread which consists of buying near-the-money calls and selling a greater number of further out-of-the-money calls.
An example would be, using the SPDR 500 Trust, that one could buy one December 273 call for around $7.50 per contract, then sell 3 contracts of the December 285 calls for what would cost around $2.00 per contract.
The total net debit of the contract position would be $1.50 or $150 per 1×3 contract spreads. The potential profit is $10.50, or 700%, if shares are at the 285 strike on the December 21st expiration.
Now go out and vote!
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