As if there’s not enough else to worry about, we’re now six and a half months away from the next presidential election.
Now, I’ll never write about politics for my subscribers, but if you’re concerned about how the stock market might react to the election, regardless of the political outcome, you can use options to hedge your portfolio.
The simplest way to hedge a portfolio is to buy put options on the S&P 500 or the Nasdaq, and I will go into much greater detail on how to do so below …
If you have a traditional portfolio that is made up of a typical blend of stocks and mutual funds, then the best hedge is likely a put option on the S&P 500 ETF (SPY). For example, with the election on November 5th, I might look to buy the following position:
Buy to Open the SPY December 495 Puts (exp. 12/20/2024) for $20.
The most you could lose on this trade is the premium paid, or $2,000 per put purchased should the SPY close above 495 on December expiration.
However, to the downside, this put would gain in value by $100 for every one point the S&P drops below 475, which is this trade’s breakeven.
This is actually a fairly cheap price to hedge a portfolio as you would get bearish exposure for the next seven and a half months, as well as through the election.
Switching gears …
If your portfolio has more exposure to growth stocks via AI, semiconductors, cloud stocks, or really any technology plays, the best way to hedge that exposure is via a buy of Nasdaq ETF (QQQ) Puts. For example, if I wanted to hedge that portfolio through the Presidential Election I might look to buy the following position:
Buy to Open the QQQ November 425 Puts (exp. 11/15/2024) for $22.
The most you could lose on this trade is the premium paid, or $2,200 per put purchased should the QQQ close above 425 on November expiration.
However, this put would gain in value by $100 for every one point the QQQ drops below 403 (breakeven level).
This is actually a fairly cheap price to hedge a portfolio as you would get bearish exposure for the next six and a half months, as well as through the election.
Finally, I do want to note that I’ve received several questions regarding the Chicago Board of Options Volatility Index, which is more commonly referred to as the VIX. The general question about the VIX, which some traders refer to as the “Fear Index,” is why this barometer of worry is so low headed into a potentially contentious election.
The simple answer is the VIX price is driven by the expected market moves for the S&P 500 over the next 30 days, and with the election still eight months away, the VIX is not the best gauge of investor concern regarding the election.
Stepping back, I don’t know who will win the election, and taking that a step further, I’m not sure how the market will react to either of the candidates being elected. That being said, if you are concerned about the market reaction to President Biden or President Trump taking office, the price of puts is attractive for seven or eight months of portfolio protection.
