We’re just about a month away from the big day, and most investors are thinking that the election will have some kind of big impact on the market. Of course, if you have a long-term diversified portfolio, then the election outcome is irrelevant to your investment strategy.
Some people still wish to hedge portfolios, or find ways to make more money via options trading. In fact, this is one of the strategies I employ when I roll out The Liberty Portfolio stock advisory newsletter in January. That’s also the point of using options sometimes — to generate additional income.
A lot depends on which way you think the election will turn. I would be more likely to go after trades on stocks and sectors than on overall indices. You just don’t know if the indices will move in a big way or not.
In addition, the moves may occur before the election if one candidate’s polling starts to move sharply.
2016 Election Puts and Calls: Sturm Ruger (RGR)
The prevailing wisdom is that if Clinton wins, then American gun rights will be in a lot of trouble. The expectation is that she’ll appoint a liberal Supreme Court Justice, and Second Amendment rights will be curtailed. Traditionally, gun control threats turn into huge demand for guns and accessories.
In that case, and considering the recent selloff in Sturm Ruger & Company Inc (NYSE:RGR), you might want to consider creating a couple of long positions. RGR closed at $56.71 on Wednesday, which is about 30% below its recent highs. You could just buy the Nov $57.50 calls for about $2.65 each. That limits your risk instead of buying 100 shares for $5,750.
There’s another play I like better, though. You can still buy those calls, but I would actually finance each one by selling a corresponding Nov $57.50 naked put for $3.50. RGR stock gets put to you if it falls below that number, in which case I think you get RGR at a bargain price, and if it rises, it cost you nothing and you profit.
2016 Election Puts and Calls: Cloud Peak Energy (CLD)
If Trump is elected, he vows to revive the U.S. coal industry, which was driven into the ground by regulations. With few coal players left, I think the bet here is Cloud Peak Energy Inc. (NYSE:CLD).
CLD closed Wednesday at only $5.36. So you have a chance at some solid upside here with limited downside. CLD is actually in decent shape financially, with $64 million in cash, and operational cash flow that is still pretty solid.
Again, you could just buy the Nov $5 Calls for $1 each. That’s a pittance, and if coal returns to its former glory, you might see CLD return to its $20 highs of 2014.
You could finance those calls by selling Nov $5 naked puts for $1.95. I’m not quite as keen on this, however, because the calls just aren’t that pricey.
2016 Election Puts and Calls: Apple (AAPL)
If Trump wins, he also has a great plan to offer discounted tax rates for corporations that repatriate their foreign-held cash. That’s several trillion dollars and it will be great for the market and the economy.
It’ll also be great for Apple Inc. (NASDAQ:AAPL), because it holds about $200 billion in cash overseas. If it can save $40 billion in taxes, it makes the stock arguably worth another $5 to $7 per share.
Now, if you use the Nov. 11 expiration date, you’ll also be contending with earnings, so there could be a lot of volatility here. I think the play here is to sell naked puts and use them to buy calls. If the stock is put to you, there are worse things than owning Apple. If Apple soars, as it could with both a great earnings report and a Trump win, you’ll make out very well.
AAPL closed at $113 on Wednesday. I would sell the Nov 11 $112 naked puts for $3.10, and buy the $113 call at the same expiration for $3.80.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
