Four months is an eternity in politics, and both politics — and the stock market — are couched in uncertainty. The good news is options are perfect when it comes to uncertainty, and they can allow an investor to make a few bets or hedge a few positions to blunt that uncertainty.
So what might the election mean for various sectors, and how can you use options to profit from the possibilities?
If you think Mitt Romney is going to win, you might want to be in the energy business. Well, actually, I think oil producers are “hold forever,” so you should be in those anyway.
In this case, however, I think you want to buy calls in the oil service sector. The presumption is that Romney will lift drilling restrictions currently in place, and that will mean a lot more drilling capacity will be required. You might choose to buy the Market Vectors Oil Services ETF (NYSE:OIH) January 38 Calls for $2.70 to take advantage of this. If your want pure plays, then you definitely go with Schlumberger (NYSE:SLB) and buy the January 70 Calls for $5. And you can’t go wrong with Halliburton (NYSE:HAL) on the January 32 Calls for $2.80.
If Romney wins and Republicans take the Senate, expect the Dodd-Frank financial services law to be effectively gutted. Financial stocks across the board should benefit. The Financial Select SPDR (NYSE:XLF) January 15 Calls can be had for a mere 55 cents. By then, all the hubbub surrounding JPMorgan Chase (NYSE:JPM) should also have passed, meaning the January 35 Calls at $2.80 may be a good choice.
Likewise, Obamacare stands a good chance of repeal in this scenario. In this case, health insurance and hospital companies will be the big losers. The Community Health Systems (NYSE:CYH) December 25 Puts for $2.50 are one way to play this. HCA Holdings (NYSE:HCA) January 26 Puts are going for around $2.50 as well. Tenet Healthcare (NYSE:THC) January 5 Puts are at 95 cents.
On the other hand, should President Obama win, the exact opposite plays do not necessarily apply. I wouldn’t necessarily buy puts on oil service stocks, for example. They’ve lived with the current situation for four years already, so I think pessimism is baked into those stocks.
Likewise, financial stocks may not crater strictly as a result of the election. If anything, I’d stay away from the sector because of its volatility and scandal that still appear to be infecting the stocks. I suggest the calls if Romney wins only as a trade. However, buying calls on the health care stocks may make sense, as uncertainty will be removed from that scenario.
Lawrence Meyers does not hold a position in any security mentioned. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.