Markets Charge Forward On Electoral D-Day

December 11, 2000
Tony Saliba

I can’t help but go back to my column of Nov. 15, when I said that if the election
ended up in the Supreme Court, it “would be the death of the market.” It
has and it was. If not completely killing the averages, this political path has killed the
attitude and sentiment of the period, and has wreaked havoc on many stocks. It has been an
opportunity for many daytraders, using options as the medium, but has been cause for a
new method of scrutiny before executing. Volatility has been extreme and out of character
for this time of year.

The volatility has turned on political news that gets reversed almost within hours, and
makes it very difficult for a daily column such as this to assist in such short-term
trading horizons. There have been more pitfalls than normal, and we have been reluctant to
“step out” with discussion of strategy.

For instance, those of you that leave your quote montage on at 4:00 p.m. ET missed an
entire day’s move in three minutes’ time on Friday afternoon. S&P 500 futures, up over 30
points the entire day (approaching +50 at one point) reversed the entire gain it closed
with at 4:00 p.m. and dropped close to 40 points once the verdict from the Florida Supreme
Court was announced.

These are dangerous sentiment swings. If you are using options for spreading purposes,
you cannot count on legging in and out of your positions without extreme risk. Once we are
through these political/legal events of national significance, legging spreads will be
discussed and even advocated.

Our stance for trading positions has been consistent throughout. We have urged use of
spreads taking advantage of high volatility on out of the money options. Along with these
spreads (verticals, for now) we have advocated owning (buying) low priced, further out of
the money options, to take advantage of large moves. These cheap options would show up on
an implied volatility chart as being very high. But since the actual cost of the option is
low (less than $1 in some cases), it makes for a reasonable alternate strategy.

By the time you read this, the currently strong
sentiment may have reversed itself again. If we are still up, as we are at this moment,
closing out remaining call verticals should be what you work on this morning.COLOR=”#800000″>

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Markets Charge Forward On Electoral D-Day

BUY THE FEAR, SELL THE GREED

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