Should You Trade the Election?

by Traders Reserve | November 4, 2012 9:00 am

Should You Trade the Election?

The crowds are already voting in many states, the rest are putting in their earplugs as a way to survive all the ads they are trying to ignore through Tuesday. I recommend Flents plugs, they are great especially if there is someone snoring within twenty feet.

Speaking of snoring, I am recommending that you, as a trader or investor, sit out the election, take a nap, avoid trying to speculate on the markets. Vote, do not trade.

Why? Too many possibilities of the indices moving based not just on the outcome but what may already be priced into the market.

Here are some scenarios:

Why does the market go up with an Obama victory if that is already priced in? First, some certainty, Second, continued policy of easing at the Fed, assuming Obama re-appoints Bernanke.

Screams of  blow-dried pundits

Do not get suckered by the blow-dried pundits pushing ahead of each other to get air time on CNBC. They are all screaming that if Romney wins, the ACA (Obamacare to me and you) will be repealed, Dodd-Frank will be repealed, and, forgive the political crack, life on the planet will go back to normal as we pass tax cuts that save the economy, save the country, save the whales.

Ain’t gonna happen.

The Democrats, regardless of the presidential election or even the senatorial elections, will filibuster any changes to the ACA, Dodd-Frank or full re-instatement of the Bush tax cuts. Not my opinion; this has been stated by more than one Democrat in the Senate. Romney is telling all who will listen he has a laundry list of executive orders he will put in place to get around this problem. If he does this, not one appointee — there are 150 appointees, including the Cabinet — will ever get approved by the Senate.

So, ignore the pundits and ignore what you may think are trading opportunities with the election. The real opportunities lie in two places: first, the buying of puts on selected names and sectors during the lame duck session and acceleration to the fiscal cliff. Second, the selling of puts to generate income as volatility increases as we near the cliff, increasing the premiums paid for puts. You can do 15%-18% a year selling puts in calm times; you can do a lot better when volatility spikes due to financially (and in many cases, constitutionally) illiterate politicians.

For those who just can’t sit it out

If you insist on doing something, look at selling Apple (NASDAQ:AAPL[1]) puts. The stock is selling at half its fair value. If you get put the stock you turn around and sell premium rich calls. Other names I believe will push through any problems in the market are the automakers: Ford (NYSE:F[2]) and General Motors (NYSE:GM[3]); both just had great results.

Less than a week to go and I still see an Obama victory, the ultimate irony being the increasing possibility Obama wins the electoral college and Romney wins the popular vote. I guess what goes around comes around.

See ya after the election.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  3. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM

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