One Way to Prepare for Midterm Elections

05:16 08/29/2018

With history as our guide, it’s essential we pay close attention to volatility. Especially with midterm elections just weeks away. In fact, as we near November 6, the relative calm we’ve enjoyed in the markets could come to an abrupt ending that many aren’t prepared for. For months, many of us have been short the fear gauge, or the Volatility Index (VIX). But with political uncertainty nearing, and fears of where our economy could be headed as a result, smart money may want to consider flipping that bet. "Looking at the VIX term structure, the market is bracing for some sort of volatility event in the next two to three months," Russell Rhoads, head of derivatives research at the TABB Group said, as quoted by CNBC. "This extra risk premium in the futures seems to be bringing back the short volatility trade." Granted, this midterm election could be a bit volatile. Then again, so have many previous midterm elections. History shows us that. In 1990, the VIX jumped from 16 to 36 In 1994, the VIX jumped from 11 to 18 In 1998, the VIX jumped from 16 to 45 In 2006 and 2010, the VIX fell In 2014, the VIX jumped from 12 to 40 As we can clearly see midterms can create a volatile mess. Assuming we could see a repeat ahead of the 2018-midterm elections, it may be best to prep for the likelihood. Traders can always prep for volatility by trading the VIX, or even the iPath S&P 500 VIX Short-Term Futures (VXX). You can also use the Velocity Shares Daily 2x VIX Short-Term ETN (TVIX) and the ProShares Ultra VIX Short-Term Futures (UVXY).

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