Author Topic: Non-Mustachian Gamble on the Presidential Election  (Read 5188 times)

Lordy

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Non-Mustachian Gamble on the Presidential Election
« on: October 27, 2016, 02:56:27 AM »
Dear fellow Mustachians,

with the results of the presidential elections only two weeks away, I was pondering the following idea:
Let's assume that Trump wins it (yes, I have read the polls). Like the (equally unexpected) Brexit, this may cause
some turmoil in the market on the following day. Let's assume that the S&P 500 drops by 5%.

If I am convinced that an index will drop on a specific date, how can I find the biggest leverage based on this assumption?
Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?

I know this is very un-mustachian but I am always curious :-)

Cheers, Lordy

Proud Foot

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #1 on: October 27, 2016, 09:07:19 AM »
The only problem with this is the fact that it has never* happened since the 1952 election. Not that it happened then either but that was the first Presidential election after the formation of the S&P500.  I don't know the history of the elections to see if there have been any unexpected winners.

*It did happen in 2008 (+4% on election day, -5% on the two days following) but this was in the middle of the markets collapsing and Obama winning was not unexpected.

MustacheAndaHalf

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #2 on: October 27, 2016, 10:19:02 AM »
Forget about the upside for a moment, and consider how much of a loss you're willing to sustain.
The return on an expired option is -100%.  You purchase an option, and if it doesn't work, it's worthless.

Interest Compound

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #3 on: October 27, 2016, 04:47:02 PM »
Dear fellow Mustachians,

with the results of the presidential elections only two weeks away, I was pondering the following idea:
Let's assume that Trump wins it (yes, I have read the polls). Like the (equally unexpected) Brexit, this may cause
some turmoil in the market on the following day. Let's assume that the S&P 500 drops by 5%.

If I am convinced that an index will drop on a specific date, how can I find the biggest leverage based on this assumption?
Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?

I know this is very un-mustachian but I am always curious :-)

Cheers, Lordy

Your premise isn't very accurate:

     1. It assumes Trump winning and Brexit are/were both "equally unexpected".

     2. It assumes Trump winning would cause the market to drop 5%.

For #1, you're way off here. Leading up to the Brexit referendum, the polls were just about 50:50 for each side. The final results ended up being 52:48 in favor of leaving the EU. That's a 4 point swing, but only 2 points off from the pre-referendum polls. Well within the margin of error.

Comparing that to Trump vs Hillary, the popular-vote margin between them is about 50:43 in favor of Hillary, but that's not important. What's important is the Electorial Vote margin, where the conglomeration of all polls are currently showing Hillary to be ahead 344:193 (270 electorial votes are needed to win). As you can see, this is a much different scenario compared to Brexit.

For #2, why add this additional layer of complexity? There's no telling what will happen to the markets, no matter which candidate wins the election. If you want to bet on Trump winning, you can do so directly. The current betting-odds are about 5:1 in favor of Hilary winning:


Source: https://m.oddschecker.com/m/politics/us-politics/us-presidential-election-2016/winner

So for every $1 you bet on Trump winning, you'll get $5 in return if it actually happens. If you're wondering how these odds were determined, this is very similar to how the stock-market settles on a particular price. This isn't like watching the typical talking-heads on the news, when you watch the news, they have a monetary incentive to make things seem closer (and more sensational) than they really are. This attracts more ratings, and directly leads to millions of dollars in their pockets. This isn't that. These people have an incentive to determine accurate odds, otherwise they lose millions of dollars. If you think the odds are wrong, it's like you're day-trading a hot-stock, with the mindset that the market has mis-priced the stock, and nobody knows it but you (hint, most people lose at this game).

Now that the facts are out of the way...here's my opinion. Looking at the numbers, and only the numbers (zero human-analysis), the odds are very much against Trump winning:


Source: http://projects.fivethirtyeight.com/2016-election-forecast/

So I think the 5:1 odds are pretty accurate here. Don't blow your stache trying to hit a home-run. Slow-and-steady wins the race.
« Last Edit: October 27, 2016, 06:58:09 PM by Interest Compound »

talltexan

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #4 on: November 02, 2016, 01:14:10 PM »
If you're looking to place a bet in the stock market, consider a leveraged index of latin american stocks, such as LBJ. I think it's triple-levered. It seems to co-move nicely with the 538 estimate of Clinton's win-probability.

Vagabond76

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #5 on: November 02, 2016, 01:52:05 PM »
The return on an expired option is -100%.  You purchase an option, and if it doesn't work, it's worthless.

An expired, unexercised option is hardly worthless.  When done right, the option was insurance or hedge against a more catastrophic loss.  I didn't get in a wreck and my house didn't burn down last year, but I would hardly call the insurance I bought on them to be worthless.

Now is the election of Trump (or Hillary) a "catastrophic loss"?  No, unless you are one of Interest Compound's media types that stands to profit from doom and gloom reporting or you bet the farm on the outcome.

FIPurpose

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #6 on: November 02, 2016, 03:25:29 PM »
If you really think there will be a 5-10% loss write a ratio put spread option. That will be a lowish risk trade with a good up-side. My guess though is that the election has little to no movement in the stock market.

jjcamembert

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #7 on: November 02, 2016, 04:14:44 PM »
I like Interest Compound's answer. The markets have already priced in what they think will happen; it's a 50/50 shot no matter what.

Let's assume that the S&P 500 drops by 5%.

If I am convinced that an index will drop on a specific date, how can I find the biggest leverage based on this assumption?
Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?

So for a quick thought experiment, I'm looking at the SPY 9 Nov options. You can find this information on almost any trading website. SPY is around 210 at this time, and the implied volatility is saying that the market "expects" SPY has a 68% chance to stay within a +-5.65 range (to make a 1 standard deviation move). So between 204 and 216 to make it simple.

Now you're saying a 5% down move, or 10 point drop, so you're looking at SPY 200 or below. The SPY options say that the market thinks there's about a 10% chance of that happening. They're also saying about a 10% chance of rising past 216, or a 3% upside move.

So what could you do with this information if you're certain of a 5% drop? There's a ton of choices, here's a few. Disclaimer: I don't personally recommend any of these ideas!

1. Sell the 209.5 call. You'll make around $2.90 right now, and you get to keep it if you're right. But you have unlimited upside risk past 212 (209.5+2.9).

2. Same as above, but buy the 210.5 call to limit upside risk. Instead of making $2.90, you'll only make $2.90 - $2.40 = $0.50. But now if the stock moves above 210.5 you only lose $0.50 too. Basically a "risk one to make one" move. Your odds are about 50% too, but now you know your risk.

3. Ok, but you're really certain about hitting 200. Sell the 200 call and make $10.10. Buy the 209.5 call for $2.90 as upside protection. You make $7.20 if you're right, and lose $2.30 if you're wrong. About a 30% chance of making money, and look at those numbers, about 3:1 as well! Personally, I'd rather give myself a 70% chance to make money, but to each his own.

4. Buy the 210 put. It'll cost you about $2.90 right now, so to break-even the stock needs to move below 207 for you to profit. If it gets down to 200 you make about $700 off of your $290 "investment". Hmm, that's interesting, the numbers are very close to option 3, and you have no upside risk. However, the extra $0.70 is what you are paying for time value.

5. Any variation on these...my point is you can see the odds and take whatever side(s) you want.

Remember that everything is being priced in (interest rates, earnings, etc), not just the election. So you're being paid directly for the election, and only the election, on the gambling site.


MustacheAndaHalf

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #8 on: November 03, 2016, 02:31:49 AM »
Vagabond76 - OP originally asked "Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?".  OP wants to invest in stock options, not insurance.

Vagabond76

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #9 on: November 03, 2016, 09:09:10 AM »
Vagabond76 - OP originally asked "Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?".  OP wants to invest in stock options, not insurance.

And my point is that an option = insurance.

MasterStache

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Re: Non-Mustachian Gamble on the Presidential Election
« Reply #10 on: November 04, 2016, 06:04:38 AM »
Dear fellow Mustachians,

with the results of the presidential elections only two weeks away, I was pondering the following idea:
Let's assume that Trump wins it (yes, I have read the polls). Like the (equally unexpected) Brexit, this may cause
some turmoil in the market on the following day. Let's assume that the S&P 500 drops by 5%.

If I am convinced that an index will drop on a specific date, how can I find the biggest leverage based on this assumption?
Is there a search engine I could use to find an option or certificate that would yield the highest return in such an event?

I know this is very un-mustachian but I am always curious :-)

Cheers, Lordy

Your premise isn't very accurate:

     1. It assumes Trump winning and Brexit are/were both "equally unexpected".

     2. It assumes Trump winning would cause the market to drop 5%.

For #1, you're way off here. Leading up to the Brexit referendum, the polls were just about 50:50 for each side. The final results ended up being 52:48 in favor of leaving the EU. That's a 4 point swing, but only 2 points off from the pre-referendum polls. Well within the margin of error.

Comparing that to Trump vs Hillary, the popular-vote margin between them is about 50:43 in favor of Hillary, but that's not important. What's important is the Electorial Vote margin, where the conglomeration of all polls are currently showing Hillary to be ahead 344:193 (270 electorial votes are needed to win). As you can see, this is a much different scenario compared to Brexit.

For #2, why add this additional layer of complexity? There's no telling what will happen to the markets, no matter which candidate wins the election. If you want to bet on Trump winning, you can do so directly. The current betting-odds are about 5:1 in favor of Hilary winning:


Source: https://m.oddschecker.com/m/politics/us-politics/us-presidential-election-2016/winner

So for every $1 you bet on Trump winning, you'll get $5 in return if it actually happens. If you're wondering how these odds were determined, this is very similar to how the stock-market settles on a particular price. This isn't like watching the typical talking-heads on the news, when you watch the news, they have a monetary incentive to make things seem closer (and more sensational) than they really are. This attracts more ratings, and directly leads to millions of dollars in their pockets. This isn't that. These people have an incentive to determine accurate odds, otherwise they lose millions of dollars. If you think the odds are wrong, it's like you're day-trading a hot-stock, with the mindset that the market has mis-priced the stock, and nobody knows it but you (hint, most people lose at this game).

Now that the facts are out of the way...here's my opinion. Looking at the numbers, and only the numbers (zero human-analysis), the odds are very much against Trump winning:


Source: http://projects.fivethirtyeight.com/2016-election-forecast/

So I think the 5:1 odds are pretty accurate here. Don't blow your stache trying to hit a home-run. Slow-and-steady wins the race.

FYI, the odds for Hillary are 1:5. That's below even odds which means you would make very little money betting on her ($2 bet would net $2.20). Below even odds means they are an overwhelming favorite.