Can These Options Market Signals Help Predict the Election Outcome?

Listen to the options market to avoid becoming one of the many investors who have essentially checked out until we know the way the votes stack up after the Nov. 3 presidential election.

After all, they say, the electorate is too polarized to provide any kind of conviction and the polls cannot be trusted. I remember the news networks calling me at 2 a.m. exactly four years ago when Republican presidential nominee Donald Trump defied all the odds and defeated Democrat Hilary Clinton.

Futures markets around the world were crashing, as people who guessed wrong thought it was the end of the world. Nobody on Wall Street had thought about what a Trump administration would entail. All they could focus on was that their models had failed.

But this time around, a Japanese news network has already asked me whether the market signals are predicting a President Trump or a former Vice President Joe Biden win. The answers are worth sharing with you.

Listen to the Options Market; Go from Opinions to Options

Everyone has an opinion and technology gives us the power to share infinite “hot takes” with millions of people simply by typing a few words and pushing a button.

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It’s free. You don’t even need to come up with a compelling argument or think through all the consequences, much less test your logic. When you’re wrong, the only cost is reputational.

That’s why I focus on the financial markets, where talk is cheap until we back it up with capital. Pushing the “buy” button monetizes our opinion, putting our money where our mouth is.

The Trading Crowd is Sending Signals

And when you look at all the trades circulating across Wall Street, you can see what the crowd really thinks. It’s the best, most accurate polling system ever invented.

I’m paying the closest attention to the options market when it comes to predicting the election. Unlike stocks, there’s always a time component to options. You’re arguing that the future will play out as you predict before the contracts expire.

As it turns out, S&P 500 contracts expire on Nov. 2, the day before the election, and on Nov. 4, the day after. We can see exactly where the crowd thinks the market will go before the votes are counted.

These are the kinds of contracts we’ve traded with great success this year in 2-Day Trader. The market itself can soar, slump or simply go nowhere, and we make money on the tiny fluctuations in sentiment.

A 4% Swing in Less than Four Weeks Appears Ahead

Right now, these options suggest that the market is going to move about 4% in the next 3.5 weeks. That wide theoretical gap makes sense in this wild pandemic year.

However, the contracts are almost perfectly balanced on the direction of that 4% swing ahead. Traders simply aren’t willing to take sides. It costs roughly as much to bet on the S&P 500 falling below 3,400 as it does to back up the bull case for a return to record rallies on the horizon.

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That’s what interested the Japanese reporters. They’d heard that when the S&P 500 is in positive territory across the three months leading up to an election, the incumbent party usually wins.

And when stocks drop in that three-month period, the incumbent loses close to 90% of the time. I don’t see that scenario playing out now.

S&P 500 Drop of 5-6% Would Be Needed to Erase August’s Gains

We would need to see the S&P 500 drop at least 5-6% to erase all the progress made in August. Unless Big Tech crashes again later this month, the options markets are signaling that we’ll avert that kind of slump.

That may bode well for a Republican win and a repeat of the surge of relief from many investors we saw in 2016. But this isn’t sentiment. It isn’t me talking. It’s just how the math works.

Math is how we keep racking up wins in the options market. All we need is a sense of which way a stock or sector is likely to move in a given time period. Then we see where the potential returns justify the risk.

We just scored 26% in High Octane Trader on a simple short-term bet against retail stocks. That trade only took a few hours to mature.

Once we cash out, it no longer matters where the market goes. Wall Street’s rollercoaster continues, but we’re richer than where we started.

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Read more from Hilary Kramer at StockInvestor.com

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