How to Trade the Stock Market During Presidential Election

#volatility #stockmarket

This potentially profitable trading strategy involves volatility and the US presidential election.

With the US election comes volatility in the market. Volatility can be scary, but it can also introduce opportunity. This opportunity is what I will discuss today.

The VIX is a popular volatility index "used as a barometer for market uncertainty, providing market participants and observers" (CBOE) a measure for sentiment. Also called the "fear gauge" or "fear index" this index helps investor understand the sentiment in the market and potentially hedge against market downfalls.

The VIX is a math equation. So how can one trade it? Through futures and options. Popular futures include ProShares Ultra VIX Short-Term Futures ETF (UVXY) and Barclays iPath Series B S&P 500 VIX (VXX).

So why even care about the VIX and elections? Well, elections introduce uncertainty as the nation comes to find out who the next president of the US will be. This binary outcome can have cascading effects on future economic policy, world affairs, and national sentiment.

In this video, I analyze the last three elections from 2012, 2016, and 2020 to find patterns in the UVXY prior to and post the election on November 5th. This trend trading strategy suggests that a trough in VIX price occurs in mid-October before a peak around end of month October. The VIX degrades in value right before and after the election because the next president is announced, and the market stops speculation. I used python and yahoo finance to gather data and create line charts of the UVXY for each year.

October is often a significant month leading up to the U.S. presidential election. Some key events typically take place:

Presidential and Vice-Presidential Debates: The final rounds of presidential debates are usually held in October. These debates are critical as candidates make their final case to voters, and they often influence public opinion in the weeks before the election.

October Surprise: In U.S. politics, an "October surprise" refers to a major event, scandal, or piece of news that emerges in the final weeks before the election, potentially shifting the outcome. Campaigns, media, or external events could produce a surprise.

Early Voting: Many states allow early voting in October, and the volume of early votes can provide insight into voter turnout and enthusiasm.

Polling and Campaign Push: Campaigns intensify their efforts with rallies, advertising, and strategic visits to battleground states. Polling data in October becomes more important as it reflects last-minute shifts in voter sentiment.

Supreme Court Decisions or Legislative Actions: Sometimes, key judicial or legislative actions occur that can influence the political landscape right before the election.

October sets the stage for the final push toward Election Day in November.

The VIX is a future ETF product and considered volatile. This aggressive trading strategy combines the presidential election with market speculation and volatility to profit.

Intrendias is not financial advice.

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