Weekend Update: A Speculative Bet Tuesday's Mid-Term Election


A Speculative Bet Tuesday's Mid-Term Election

In case you missed it, there is a mid-term election on Tuesday. Some argue that it may be the most critical mid-term election on our nation's political history. They may have something there and if it is true, then the possibility of the results being a market-moving event is huge. We may already be seeing the some of that effect in this past week's volatility, day-to-day as well as intraday. On Friday, the Dow started up 250 points and then quickly started falling apart, from +250 to -300. Then President Trump speculated that he would eventually come to a trade deal with China. The algorithms picked that up and ran the Dow up 200 points (from -300 to -100) in less than 30 minutes. (I am absolutely certain that with the momentum the market was exhibiting as it was falling from a high of +250 points to its low of -300 points just before his "comment" about trade with China, that we were headed for a 1,000 point loss on the Dow for the day.) Can you imagine what Tuesday and Wednesday will look like, between exit polling and actual election results? 

As much as I eschew hedging my bets, Tuesday is too much of wild card coin flip to make a big bet on just one side. With a blistering run either way a hedged bet can pay off, and in one not so far-fetched scenario, pay off on both sides as a roller coaster ride over a couple of days is possible, if not probable.

I am going to put on a VXX straddle Monday, putting an equal sized bet on both at or near the money VXX calls and puts. I'll decide the strike on Monday, but in either case the option expiration will be next Friday, November 9th. I expect to be out of the trade well before expiration. My hope is for a huge drop in the market, my calls going up 4x (no matter which way the voting goes) and I won't care what happens to the puts. If the election results send the market up instead, I'm hoping that the gains on the puts cover the loss on the calls and I will at a minimum break-even on the trade. Worst case, no market reaction to the election results at all, I lose a little on both sides of the straddle and eat some humble pie. Still, I like the odds. 

Our Trading System

As you can see in the Trades Table below, we are down to a very manageable number of intermediate term system trades. With the market dropping into an interim low and it being followed by a counter-trend rally, we have a perfect set-up for new signals, it is only a matter of time before the market generates a down bar or two to trigger some fresh Sell Signals. The first of which occurred on the close Friday:

Sell Signal: TWLO - Dec $70 put (closed at $5.95) 

 Next week may very well be a banner week for trading, stay closely tuned.