The S&P 500 index rose 2.22 percent on Monday. How does the US Election Day impact on Stocks trading? Do traders expect a sharp move?
8 November, AtoZForex – In view of the measure of intensity encompassing the 2016 US elections, and the degree to which markets are responding to each news event, one may expect that the financial markets envision a major move in the wake of the US election outcome. On Monday alone, the S&P 500 index rose more than 2 percent as a Clinton win looks to some degree more probable, now that the FBI has confirmed that the Democratic candidate is cleared from criminal allegations.
However, forward-looking options traders project a different scenario. According to them, the Election Day impact on stocks will be only moderate, and no sharp move is to be expected. Based on a “straddle” structure, the current market expectations of a 2.4% move of the S&P 500 between Monday evening and Friday, presents opportunities for traders.
What is the straddle options strategy?
It is a structure that involves buying an option on the bullish trend,along with a bearish alternative, which both trade in line with the level of the S&P 500 index. These two options are then to be terminated after Friday’s trading.
Through this trade, a person can hedge both options and remain profitable, as long as the market rises or drops more than the pre-set level laid out by the markets. In the case of the S&P 500 index ahead the US elections; the current expectations are only a move in the index by 2.4%. Whereas the previous broad expectations were a rise of 3% on Clinton win, while a 10% drop on a Trump win. Both figures are mere projections, but they were to be realized and beat the consensus of 2.4%, then the “straddle” structure would prove its profitability.
An options trader at Harvest Volatility Management, Dennis Davitt stated that the options market already begun to price in a Clinton win, which means that the 3% is moving closer. This development has could explain the climb of S&P 500 on Monday. Despite, the Clinton win got priced in by the markets, Dennis Davitt believes that a “straddle” structure could be profitable.
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