ETF: Presidential Elections and Option Implied Volatility

SPX: Short OCT 2020 Put and Long NOV 1965 Put Profit and Loss Graph Prior to October Expiration

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Source: Bloomberg

As with any option strategy, it is important to fully be aware of the risks. The entire debit of $5.00 could be lost if the expected scenario does not materialize and the S&P 500 could move violently down before the short October 2020 puts expire causing the spread to lose value. The good news is that even though the spread is short the higher strike put, it is still considered a defined risk strategy. If both put options were to go very deep in the money, the maximum loss is limited to the difference in the strikes plus the debit paid. If the October option expires worthless, the strategy will simply be long the November 1965 put for the initial debit paid, $5.00.

SPX: Long NOV 1965 Put Profit and Loss Graph Post October Expiration

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Options can provide a tremendous amount of versatility when it comes to strategy construction. No matter how you construct an option position to meet your intended goals, always remember to define your risk ahead of time and adhere to a disciplined approach. Learning about options can be a daunting task, but as John Adams once said, “Let every sluice of knowledge be open and set a-flowing.”

Chris Hausman, CMT, is Director of Risk Management and Chief Technical Strategist at Swan Global Investments, a participant in the ETF Strategist Channel.


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