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Wednesday, September 21, 2016


I vividly remember this same time four years ago. Romney was seen as the guy that would benefit the markets. The Pro-business candidate, willing to let capitalism work; willing to lower corporate taxes; resolute to nuke 'Obamacare' as a terrible policy that would only hurt small businesses. Obama was seen as, well, more of the same, but not really as business-friendly as the other candidate. Certainly not the "markets' candidate of choice".

And what happened?

Well, you can look up the exact swing low in November: it was the 16th. Right after that, the day after the elections, one of the most powerful rallies in history followed. People remember 2013 as a glorious +30% year for the markets, where price never even touched its 200 DMA. Few remember that it all started right after election day in 2012. Even when the supposedly good guy for the market did not win.

By the end of February 2013, I was down 14%. My largest draw-down ever, as a result of fighting the post-election rally.

What does this mean?

It means that, in a Trump-win scenario, even he is seen as the bad choice for the financial markets, there still can be a rally simply because uncertainty is removed. We don't have a crystal ball, and it is precisely for this reason that the commonly accepted notion that markets will correct if Trump wins, should not pollute our bias. Simply because others don't have a crystal ball either, so why believe anyone else's thesis?

Regardless of market direction, what I see is the possibility of significant moves that could hurt my Credit Spreads and Iron Condor positions. Now, I try to be as mechanical as possible in my trading and keep riding my positions based on numbers rather than emotions. However, experience also tells me I should be careful in a situation like this, so, I won't be as dogmatic this time around.

The elections take place 10 days prior to options expiration. Whichever position I end up trading using November options in the next few days, will have a post-election expiration. I will try to close it before election day as a way to reduce my capital exposure.

By late October, I will start playing a December position as usual. I won't have collected enough time decay on this one to be able to close it prior to the elections for nice profits. So, I will have to hold it through elections day. Again, dangerous environment. So, what I'll do is play it smaller, even if it means less potential profits.

The defeat of the "market friendly" candidate can still be followed by a rally. Just as it has happened in the past. The better Trump performs during the debates, and, it pains to say it, the more terrorists attack until election day, the better his odds, which would create more and more market uncertainty. It can all result in a violent directional move once the uncertainty is removed.

Let this piece be a warning to myself.

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