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.
