So…. the first presidential debate of 2020 has come and gone. As Ed Sullivan used to say “we’ve got a really big show” for ya tonight! Well, it might not have been a really big show but it could have been and it could have been a really big show in more ways than one.
If you are like me and you happen to reside north of the 49th parallel then you can only watch this dog and pony show with a morbid interest as I do not get to affect the outcome of the election in any way shape or form, well maybe I could mail in a ballot regardless like so many others I have heard are doing? LOL Just kidding, not going down that rabbit hole, at least not in this blog. However, does this mean that this doesn’t affect me as a human being, a close neighbour, and more importantly a trader?
The answer to the above question is an emphatic yes! The outcome of this election and pretty much every US election ever affects the rest of the world as the US is still and probably will be a super power for the foreseeable future. More importantly, the US economy affects most of the world as well and just so happens to have the largest trading markets in the world of which I find myself uttely enthralled with and tied to. So this election does affect me as well as countless others that don’t necessarily reside in the US.
So, we have determined that the election will affects us as humans, neighbours and traders but what about the lead up to the election? What about these debates and the countless polls and the back and forth between the parties? There is still better than a month before the acutal election and there are going to be all sorts of events that will affect us.
The part that most deserves our attention is the affect on our trading that these events have. Do you remember BREXIT? It was kind of a big deal and many far reaching consequences. The thing I remember most about BREXIT was the increased market volatility. Leading up to the vote on BREXIT market volatility seemed to steadily increase and then was quite wild for the few days before, during and after the actual event. The increased volatility can be a godsend for some and a nightmare for others and regardless of where you find yourself on that spectrum you should at least understand that volatility comes with the territory when it comes to things like this.
There are several ways to recognize increasing volatility. The three that come to mind are one when your broker sends you a message saying that the margin rates are increasing, this is the easiest of all ways to know that volatility is increasing. Secondly, we have our friend the VIX. The VIX or as some call the fear gauge can be an early warning sign that volatility is likely increasing. One can look at the premiums of options from the short-dated to the longer-dated options and see an increase in volatility is coming. Finally, if you are an option seller and you have an idea of what a typical ROI might be for the options you sell and all of a sudden you start to crank up that ROI by doing virtually the same thing you have always been doing then this is also a very good sign that the volatility is increased.
Now, you have two choices when it comes to increasing volatilty you can either embrace it and roll with it or you can get out of the way of the runaway freight train that volatilty can become. Which ever way you decide to react make sure that you understand that this is a by-product of a really big show and act accordingly.
Stay sharp, Trade Well and Watch out for the Volatility Monster!
Coach “Old Money” Holmes