With the 2020 presidential election nearing, investors want to know how to trade it.
Oftentimes, the best way to trade it, is by trading volatility itself.
In fact, we can use the Ultra VIX Short-Term Futures ETF (UVXY), the Velocity Shares Daily 2x VIX Short-Term ETN (TVIX), and the iPath S&P 500 VIX Short-Term Futures (VXX) to trade expected moves in the Volatility Index (VIX).
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After all, if there’s a history of wild volatility ahead of elections, why not take advantage of it?
1992 Election Year: Bush v. Clinton
For example, right before the 1992 election, the VIX exploded from a low of 12.47 to 20.51. At the same time, the Dow Jones slipped from a high of nearly 3,400 to less than 3,100, handing investors the opportunity to trade uncertainty ahead of elections.
1996 Election Year: Clinton v. Dole
In 1996, volatility popped and dropped ahead of the election a few times. In August 1996 for example, the VIX ran from 13.70 to a high of 20.51 again. On uncertainty, the Dow would slip slightly from a high of 5,762 to a low of 5,550 only to recover shortly after. Again, uncertainty gave way to a short-side opportunity.
2000 Election Year: Bush v. Gore
Ahead of this election, the VIX exploded from a low of 16.54 to a high of 31.74. At the same time, the Dow slipped from a high of 11,400 to a low of 9,651. Again, investors were offered an opportunity to make money from uncertainty on the short-side of the market, and on the long side of volatility.
2004 Election Year: Bush v. Kerry
Volatility wasn’t as severe in this election year. Still, we did see a small bump in the VIX, as expected in October 2004 from a low of 13 to nearly 17. The Dow slipped from a high of 10,400 to a low of 9,700 again offering opportunity.
2008 Election Year: Obama v. McCain
The VIX exploded this year from a low of 20 to a high of 90, as the Dow plummeted from 11,500 to a low of 7,500. Of course, much of this was also due to subprime fallout this particular year. Still, it offered us another opportunity in an election year.
2012 Election Year: Obama v. Romney
There wasn’t a great deal of volatility here, but there was some. In fact, in August 2012, the VIX began to jump from a low of 13.28 to a high of nearly 20. The Dow would pull back slightly.
2016 Election Year: Trump v. Clinton
As expected, the VIX ran higher. This time, it popped from a low of about 12 to more than 22 heading into election uncertainty. The Dow would trend lower over this time frame. Still, it offered us an opportunity to trade the long side of volatility, and the short side of markets.
Interesting to note, once uncertainty began to fade after each election, so did market fear.
As that happened, investors could trade the long side of the market, and the short side of volatility. Keep this in mind in 2020.
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