Stocks could swing wildly once the election results are known, and those who make book on such things, effectively selling “insurance” against the unknown, aren’t taking any chances. It will cost investors an arm and a leg to straddle the bet. How much? Here’s a post from ‘Mavin’ in the Rick’s Picks chat room that offers a precise reckoning of the odds: “I don’t know how many of you are familiar with volatility and volatility risk. Volatility is not only priced in for the election, but also for an extended period of time after the election. Here is the interesting part of the volatility. We are seeing one of the highest volume and open interest in the volatility instruments. The implied volatility of the SPX for four days out, after the election, implies a 60-point move up or down. The implied volatility indicates that the six-day expiration indicates a 71-point move. So you are looking at ranges of 120 and 142 as your basic one-standard-deviation move — equivalent to a 1000-point move in the Dow. That is not the scary part. The probability of a touch is two times the implied volatility move. That gives you a probability of a touch 142 points in either direction or 120 points in either direction. There are several election outcomes. Either Trump or Clinton will win. But what happens if it is close enough that it can’t be called until Wednesday or Thursday? To me that is what the six-days-to-expiration implied volatility is telling me. We shall see.” ________ UPDATE (6:35 pm. EST): Looks like stock are not waiting until after the election to go crazy. The E-Mini S&Ps have taken a giant leap Sunday evening, up the equivalent of 250 Dow points. If it’s because they are confident Hillary will win now that Comey has ‘cleared’ her, then God help us all. It remains to be seem whether speculators have obliged themselves to crater stocks, pushing the Dow down by 1000 points, if Trump shocks them by winning.
Option Volatilities Imply Huge Post-Election Swings
- November 7, 2016, 3:41 pm
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November 7, 2016, 10:53 am
Rick, the rally looks like a test of the 34-week EMA, not necessarily a harbinger of the election outcome. But you have to wait for the weekly close for a confirmation now, once the election is over. That markets rally globally on news that the email scandal has no basis is perhaps stretching the truth. Markets WERE and STILL ARE unwinding once the top was in.
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Nice to have you back, Fran. I shared your observation with 60 or so subscribers who came to an impromptu tech-analysis webinar this morning. There are no good reasons why stocks should not be construed as setting up for a 10,000-point plunge in the Dow. As you imply, however, the question will remain as to whether a manic buying binge awaits in the interim, between election day and Thanksgiving/Christmas. RA
Rick, As you will readily acknowledge the “smart money” will always be looking to sell on highs so the current mark up could be that transaction. They seems to use the news as the catalyst to do what they determined well ahead of time…thats why the actions sometimes wrong foot us all Its almost irrelevant what the outcome is on the elections if they wish to get out they will mark it up to do so.
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I completely agree, Jim. DaBoyz use all news, any news, as opportunity, regardless of its meaning. However, even “They” cannot know at the outset how successful their next goosing of stocks will be — don’t know, for one, whether short-covering panic will kick in so powerfully that the current rally/hoax will blast off into record-high territory. I did an ‘impromptu ‘ webinar this morning to show what could happen if all hell actually does break loose. In brief, the technical case for Dow 20,000 — on fumes and bullshit buying — is not even slightly farfetched. RA