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November 6, 2016 | Option Volatilities Imply Huge Post-Election Swings

Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, an online service geared to traders of stocks, options, index futures and commodities. His detailed trading strategies have appeared since the early 1990s in Black Box Forecasts, a newsletter he founded that originally was geared to professional option traders. Barron’s once labeled him an “intrepid trader” in a headline that alluded to his key role in solving a notorious pill-tampering case. He received a $200,000 reward when a conviction resulted, and the story was retold on TV’s FBI: The Untold Story. His professional background includes 12 years as a market maker in the pits of the Pacific Coast Exchange, three as an investigator with renowned San Francisco private eye Hal Lipset, seven as a reporter and newspaper editor, three as a columnist for the Sunday San Francisco Examiner, and two decades as a contributor to publications ranging from Barron’s to The Antiquarian Bookman to Fleet Street Letter and Utne Reader.

Stocks could swing wildly once the election results are known, and those who make book on such things, effectively selling “insurance” against the unknown, aren’t taking any chances. It will cost investors an arm and a leg to straddle the bet. How much? Here’s a post from ‘Mavin’ in the Rick’s Picks chat room that offers a precise reckoning of the odds:  “I don’t know how many of you are familiar with volatility and volatility risk. Volatility is not only priced in for the election, but also for an extended period of time after the election. Here is the interesting part of the volatility. We are seeing one of the highest volume and open interest in the volatility instruments. The implied volatility of the SPX for four days out, after the election, implies a 60-point move up or down. The implied volatility indicates that the six-day expiration indicates a 71-point move. So you are looking at ranges of 120 and 142 as your basic one-standard-deviation move — equivalent to a 1000-point move in the Dow. That is not the scary part. The probability of a touch is two times the implied volatility move. That gives you a probability of a touch 142 points in either direction or 120 points in either direction. There are several election outcomes. Either Trump or Clinton will win. But what happens if it is close enough that it can’t be called until Wednesday or Thursday? To me that is what the six-days-to-expiration implied volatility is telling me. We shall see.

________ UPDATE (6:35 pm. EST): Looks like stock are not waiting until after the election to go crazy. The E-Mini S&Ps have taken a giant leap Sunday evening, up the equivalent of 250 Dow points. If it’s because they are confident Hillary will win now that Comey has ‘cleared’ her, then God help us all.  It remains to be seem whether speculators have obliged themselves to crater stocks, pushing the Dow down by 1000 points, if Trump shocks them by winning.

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November 6th, 2016

Posted In: Rick's Picks

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