The upcoming US presidential election is generating significant buzz in the trading world, particularly as we approach the October options expiry. This week’s expiry sees a record-breaking concentration of options expiring, signifying heightened market uncertainty and a reluctance among traders to make major moves leading up to the election.
While the market appears to be holding its breath until the election, a close and contested outcome poses the biggest risk. This scenario would likely trigger heightened volatility and potentially lead to market instability. Conversely, a decisive victory for either candidate would bring much-needed clarity, allowing traders to make more informed decisions and potentially driving market gains.
In this volatile environment, a strategic approach to managing risk is paramount. My preferred strategy for navigating this uncertain period is to buy long VIX calls. The VIX, or Volatility Index, is a key indicator of market volatility, and its price tends to rise during periods of uncertainty, such as the election. Buying VIX calls allows traders to profit from an increase in volatility, essentially acting as a hedge against potential market losses.
My analysis suggests that traders are currently leaning towards out-of-the-money (OTM) downside protection, keeping VIX bid (increasing demand and potentially pushing prices higher). Recent price action in the VIX has formed a solid base, and I’m observing traders taking advantage of dips by buying up long VIX calls. My plan is to capitalize on this trend by purchasing November 13 VIX calls, taking advantage of any minor intraday dips.
The goal of this strategy is two-fold: to profit from potential volatility spikes and to maintain a hedge in case of a market downturn. Should the election results be clear and uncontested, the elevated volatility is likely to subside, potentially leading to a market rally. In this scenario, I plan to shift my strategy by buying VIX puts for the December expiry, aiming to capitalize on the potential decline in volatility while also targeting gains in equities like the SPY index.
My decision to use VIX options as a hedging strategy is supported by my PFP (Positioning, Flows, and Price Action) system. The system indicates that price action is bouncing off the support zone, flows show strong demand for long VIX calls, and the overall market positioning suggests a high degree of call option activity.
I will update my traders with further details and trade triggers as we move closer to the election, and we’ll conduct a comprehensive post-election analysis to evaluate our performance and determine the best strategies for navigating the new market environment.