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Trade of the Week – Directional volatility trades

October 28, 2020

Trade of the Week – Directional volatility trades

This is the last week before the US election on Tuesday the 3rd of November. While the market will be much more prepared for a Trump victory, should he win this round, it looks likely that Biden will take the lead.

This is the last week before the US election on Tuesday the 3rd of November. While the market will be much more prepared for a Trump victory, should he win this round, it looks likely that Biden will take the lead.

Either way we should expect the XJO to experience more volatility prior to the election, and quickly drop off afterwards.

Prior to the US election in 2016, implied volatility jumped from 10.8 on the 25th of November to 18.4 on the Friday 4th of November. The election results came out on the 9th of November (Australian time) causing a second spike of implied volatility to 20.2 after Trump was announced the winner.

This election provides you with an opportunity to trade the upcoming volatility in the market.

If you believe the market will rise as we approach the election, you can enter a long call position. If you believe the market will fall as we approach the election, you can enter a long put position. These positions will increase in value as the implied volatility rises (ceterus paribus). You could close the position prior to the election to cash in on this volatility. Keep in mind that time decay will be working against you and the market may also move against you.

Alternatively, you could enter into a credit spread prior to the election with the view of exiting the position after the election when volatility has fallen. You will receive a premium for entering the position initially, then will pay a premium (hopefully less) to exit the position after volatility drops (or hold the position until expiry). With a credit spread, time decay works in your favour. A bull put spread would suit a bullish trader. A bear call spread would suit a bearish trader.

If you would like some more information on options trading strategies, call 1300 805 795

Please note we provide General Advice only. You can follow this link for a detailed tour of the Implied Volatility platform.

Book in for free and join us for the final session of  the Trading 360 Summit on Tuesday, 10th November, where you’ll gain access to great insights, strategies and tools from some of  the best and brightest on the trading floor.

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795.

 

Past performance is not a reliable indicator of future performance.

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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