An Ode To Post-Election Day Volatility

Election Day Trading Opportunities

In this morning’s chat with our own Don Kaufman, he outlined a trade to play a potential post-election move in the Financial Select Sector SPDR ETF (NYSEARCA: XLF). As always, he doesn’t talk about it unless he’s willing to trade about it, which he did. In this post, I’m going to bring you the setup and strategy discussed this morning with our subscribers.

Election Numbers

When I refer to numbers, I’m not talking about polls or tallied election results. It is statistical but is based on the expected movement for a particular stock or ETF.

If you’re going to trade a stock or an option, wouldn’t it be nice to know what to expect? Here’s a little-known secret about the options market, it tells you what their expecting. It’s like a poll of all of the option traders for a given expiration. By looking at the pricing, you’ll be able to know what to expect.

Many platforms will show the annualized implied volatility for each expiration. This is an average of implied volatilities across the OTM strike prices. Some will take that annualized percentage information and express it as a dollar amount for the time to expiration. This is extremely helpful information for traders.

Expected Move and the Election

If you were to look at the expected move for this week’s expiration that covers the election, it would show a +/- $1.03 move in XLF. That means there is a 68% probability of staying within that range for the next three days.

That number is adjusting through out the trading session and throughout the week.

While it’s great to see that number, but what if you could come into the week knowing what the one standard deviation range is and understand when to go long or short the underlying? That is what the expected move indicator is all about.

Oh, and by the way, all of our subscribers have access to this and all of the indicators used by our instructors. Also, you have access immediately to all of our vast archives of classes on how to use these types of indicators. Shameless plug, I know, but I know you will be asking yourself where you can get what I’m about to show you.

Election Move and XLF Setup

In the chart below, you’ll see how XLF is setting up going into the election using the Expected Move indicator. Based on Friday’s closing price of $23.86, the indicator sets you up for seeing what the market is expecting for the coming week.

(Click on image to enlarge)

In the case of XLF, the one standard deviation range was from $23.74 to $22.98. The current price of $24.91 is above the upper end of the expected move. This is a point where the price tends to revert to finish inside of the expected move.

Election Move and Verticals

Using this setup, Don showed how to use a long put vertical on XLF as a means of capitalizing on a post-election move into the range.

Here is the details of the trade:

• Buy 20 NOV 20 $25.50 put
• Sell 20 NOV 20 $24.50 put

The trade resulted in a net debit of $0.46. This is what we call an In/Out Spread and teach a high probability way of trading it using Don’s proven track record using the strategy.

This trade yields a max gain of $54 per contract for just $46 of risk. That is better than a 1:1 ratio of risk-to-reward. This is one of the requirements when considering this strategy. Also, the max gain is achieved if XLF closes below $24.50 at expiration. That’s only a $0.41 drop from its current price.

The objective with this type of trade is to take something less than max gain if a quick move lower happens.

Conclusion

Many investors and traders get really focused on looking at the price action without ever considering the market’s expectations for movement. Using the Expected Move indicator and having a set of strategies to apply in different market conditions is a key to success in trading options. Next time your trying to predict an outcome, try using this indicator as a guide.