Election Gremlins Spook the Market
The statements by Bill Daley
and former Secretary of State Warren Christopher have really inflamed fears that
the outcome of the presidential race will be in doubt for much longer than the
market anticipated. That is bad news for the bulls and particularly bad news for
anyone short option premium, as the sell-off in the stock market is translating
into outright panic.
The resultant surge in volatility has caused option sellers to virtually
evaporate. Right now (12:40 pm CST) the VIX is up 3.22 points (over 7%)
and trading 31.5%. That puts the VIX up to the stratospheric levels we normally
see in calamitous situations like the March Nasdaq sell-off, or the Russian debt
PowerRating) volatility is up to 73% near-term, Sun Microsystems
vol is up to 87% and Oracle’s
PowerRating) is up to 107%.
With trading curbs in place, there is little to do to take advantage of the
situation. As the country wrestles with the problems of this election, the
holders of stock are looking for any way to unload positions. Most traders would
against selling premiums into this market, as a prolonged inquiry is not going
to push volatility lower, but liquidations could force volatility to the moon.
Perhaps the only reasonable way to deal with this situation is to take a
controlled amount of risk by selling a put-spread in the Nasdaq QQQ.
One possible spread that fits those criteria and is being looked at is to sell the QQQ December 71 puts
for $4 and buy the QQQ December 66 puts for $2. If the QQQ (presently trading at
$74) closes above $69 on December expiration, the traders will make up to $2 per contract.
The total risk is $3, as they have sold the $5 put spread for $2.