My Best Hedge Trade Going For This Tight Presidential Election

My PFP option trading system is showing me that traders are happily making bets for the rest of this week, and then are sitting out until the election. The monthly options expiration that comes this week has a huge amount of options expiring, more than $1 billion worth on SPY. Then its crickets until Election Day on November 4.

In other words, extremely short-term trades will dominate from next week through the election, save for a few important earnings dates here and there.

Considering we have such a tight race, a close win for either candidate is the worst scenario for traders and markets as there's a really good chance the results will be contested.

The best scenario I'm hoping for is a blowout on either side, because this reduces the chance of a contested election and thus traders can make their bets clearly knowing what the path forward is.

Here's how I'm going to trade it.

Buying up long VIX calls is my preferred hedge going into this tight presidential race. The question is when and at what price.

Between now and having a clear winner, traders are likely to keep out-of-the-money (OTM) downside protection which will keep vol/VIX (volatility) bid. While I own lots of equities at this moment (SPY, META, AAPL, SQ, GLD) I don't want to necessarily buy downside protection for all of them.

Looking at the 1hr chart below, we can see how VIX formed a solid ‘corrective' structure and base in late Sep/early Oct between 18.50 and 20.25:

1hr $VIX chart

Price just dipped back into that support zone for the first time in 7 days this Monday and I'm seeing traders buy up decent amounts of long VIX calls since this dip.

I think one small ITD (intraday) dip and I'm willing to buy up some calls for November 13, which is the next monthly op-ex for VIX. While of course I'd like to make money on the direction, and take some profits, the goal will be to keep half the position open as a potential ‘hedge' in case the markets tank from a contested election.

It is important to note that an elevated VIX/vol can act as a ‘lever' for markets to rip higher post-election. If the results come out uncontested, then volatility (which is already elevated) is likely to come down. This will provide a potential tailwind for markets for the November and perhaps December op-ex. In this scenario, we'd want to get long puts in VIX for the December op-ex while targeting 600 to the upside for SPY by the end of the year.

Either way, all the components are lining up with my PFP system (Positioning, Flows and Price Action) with the price action bouncing off the support zone, flows showing traders scooping up long calls in good size, and positionally a fair dinkum of call options around the $20 strike.

I'll update my traders in the Trading Waves members area once we take the new trade or post the trade live during our next live member class. Until then, stay tuned for updates after the election, as we'll do a post-election analysis on our top plays via the PFP system.

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Image via Wikimedia Commons