The Election Hedge: A Guide to Tactical Risk Management

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Information about The Election Hedge: A Guide to Tactical Risk Management

Published on October 27, 2016

Author: DominicMarella

Source: slideshare.net

1. T H E E L E C T I O N H E D G E A GUIDE TO TACTICAL RISK M ANAGEM ENT

2. w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com Jack Bogle, Founder of Vanguard, calls our current election cycle ?the m ost chaotic within m em ory?. And that?s hardly just one m an?s opinion. Experts, analysts and pundits alike agree that what we?re seeing on the cam paign trail has never occurred before, and likely won?t occur again. Chaoti c isn?t just color com m entary. W H A T 'S T H E W O R R Y ? Fun Facts: The FBI is still releasing inform ation regarding Clinton?s ?extr em el y car el ess?m ethods of han dl i n g cl assi fi ed i n for m ati on . Trum p doesn ?t con si der Sen . John M cCai n a w ar her o because he was captured. Debbie W asserm an Schults,chairwom an of the Dem ocratic National Convention,steps down am idst allegations of r i ggi n g the dem ocr ati c pr i m ar y i n H i l l ar y Cl i n ton ?s favor . She was subsequently hired as co-chair of Clinton cam paign. Trum p is on the thi r d cam pai gn m an ager i n four m on ths. To be con ti n ued... (sources on page 8)

3. N O N E E D T O O V E R R E A C T On M arch 6th,2009, Standford professor M ichael Boskin argued that Obam a's policies - m arked by higher spending,taxes and regulations - we're "killing the Dow." If you were fearful,this insight from a respected econom ist m ight have reinforced your inclination to sell. And M arch 6th,it turned out,was about the absolute low point of the bear m arket in 2009. If you let this warning send you to the sidelines,you would have m issed out on m ore than 11,000 Dow points. "M uch of the r epubl i can par ty can 't stan d the Republ i can can di date an d m uch of Dem ocr ati c par ty can 't stan d the Dem ocr ati c Can di date," says Ar n ott of Resear ch Affi l i ates. Though he coun sel s "agai n st over r eacti n g or tr yi n g to over thi n k the i m pl i cati on s of the el ecti on ." Let'stakealook back... W e have said for years throughout various turbulent tim es,the biggest risk to one's portfolio is the capital sitting on the sidelines. Even if we were concerned of a large sell off,getting out of the m arket entirely would NEVER have been appropriate advice. The right m ove would be to m anage risk and protect your exposure intelligently. Tactical risk m anagem ent is top priority,especially when expecting a m ajor event. w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

4. it wouldEXACERBATEvolatility Ji m Ober w ei s Pr esi den t, Ober w ei s M an agem en t M ar i l yn Cohen CEO, En vi si on Capi tal M an agem en t not amassacre...just aselloff A. Gar y Shi l l i n g Pr esi den t, A. Gar y Schi l l i n g & Co. expect massivefiscal stimulus Rob Ar n ott CEO, Resear ch Affi l i ates acontinuation of thestatusquo SO W H A T 'S G O I N G T O H A P P E N ? w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

5. Di ver si fi cati on an d Ri sk M an agem en t There is absolutely no way to predict the outcom e of this election. And there's no way to predict how the m arket is going to react to whatever the outcom e is. W hether you are hedging a retirem ent account or speculating in the stock m arket, due diligence suggests to have a strategy in place before the m arket reacts. A N D T H E A N SW E R I S... W hen hedging a position,it?s im portant to understand your true exposure. W ith respect to this theatrical cam paign,it?s reasonable to assum e that the m arket m ay have an equally dram atic reaction to the outcom e. H owever,the direction is uncertain. And how you hedge will depend on your current position. Considering the need to protect your current investm ent portfolio,likely a retirem ent account... w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

6. The m ost com m on scen ar i o w oul d be the desi r e to hedge agai n st the stock m ar k et tan k i n g. Thi s i s r ather si m pl e. H ED G I N G T H E D O W N SI D E SP500 M M M (3M Com pany) FDX (FedEx Corporation) SPLS(Staples Inc.) CAT (Catepillar Inc.) H OG (H arley-Davidson) Dow Jon es H D (H om e Depot) KO (Coca-Cola) GE (General Electric) M CD (M cDonalds) DIS(W alt Disney) Russel l NTGR (Netgear) DF (Dean Foods) BW LD (Buffalo W ild W ings) BNCN (Bank Corp.) TREE (Lending Tree) NASDAQ M SFT (M icrosoft Corp.) FB (Facebook Inc.) INTC (Intel Corp.) AAPL (Apple Inc.) GOOG (Alphabet Inc/ Google Inc.) First,determ ine which index or indexes your stock portfolio represents. Second,calculate how m any Futures contracts is needed to represent the full value. Third,sell that m any futures or buy that m any put options. Fourth,rest easy. EXAM PLE: Your current portfolio is $1,000,000 and consists of com panies in the S&P500. Current M arket Price for Decem ber E-m i n i S&P 500 is currently near 2160.00. W ith a contract size of $50 x the In dex. This means, that ON E contr act represents $108,000 of your portfolio. (2160 x $50 =108,000) To hedge your entire $1,000,000 por tfol i o: A proper hedge for stock within the S&P would require either: - the sale of 10 contracts of E-m ini S&P 500 futures,or - buying 10 E-m ini Put options Major Companies by Index Next Pagefor Maintaining UpsideExposure > > w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

7. On the flip side,som e investors are so terrified of what m ay happen that they have already liquidated all positions and pull out of all investm ents. This elim inates all risk to the downside,but also rem oves the possibility of any gains should the m arket rally. To achieve this,there are a num ber of possibilities. They vary in how m uch risk is taken,how m uch potential profit is available, and how active you want the strategy to be. There is no right answer. W e?ll look at Decem ber options that expire 12/16 and will take you through the election. This strategy will likely enable you to get your position closer to the current m arket price. You wouldn?t need as big of a m ove as strategy 1. The downside is that your profit potential is capped at your top strike (less com m ission/fees paid) This would leave you with open ended profit potential (less prem ium /fees paid). Downside is that the Calls would be expensive and the m arket would need a big m ove up to m ake it worthwhile. This strategy would enable you to get an at-the-m oney spread and offset som e or all of the up-front cost by selling a Put beneath. The downside to this is again your profit potential is capped but you will also have risk with a sell off below the Put strike you sold. But, risk could potentially be m itigated by buying a Put in front of your Put strike you initially sold. This would incur an additional cost but would lim it your risk. D O N 'T W A N T T O M I SS O U T W eek 1 and/or W eek 2 options can be fairly cheap for near the m oney Calls. This would allow you to adjust your strike week to week to always be near the m oney and would be poised for an unexpected m ove. The beauty of these short term options is that if the m arket rallies early, you don?t have to spend any m ore prem ium to get long. This would require frequent attention, and you would have to m ake sure you buy another Call before the other expires. OPTION 1) Buy out of themoney December E-mini S&PCalls: OPTION 2) Buy aDecember E-mini S&PCall spread: OPTION 3) Buy aDecember E-mini S&PCall spread and Sell an out of themoney Put: OPTION 4) Buy December Weekly E-mini S&PCalls w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

8. D on't w ait for th e election . A l ot of m on ey w i l l be m ade an d l ost i n the n ext coupl e of m on ths. Star t tak i n g appr opr i ate steps n ow to r educe por tfol i o r i sk an d poten ti al l y tak e advan tage of vol ati l i ty. Risk Disclaimer and DisclosureStatement The vi ew s expr essed i n thi s ar ti cl e ar e those of the author (s) i n di vi dual l y. Thi s ar ti cl e has been w r i tten an d publ i shed for i n for m ati on al pur poses on l y an d shoul d n ot be con str ued as speci fi c i n vestm en t advi ce. Tr adi n g futur es an d opti on s i n vol ves the r i sk of l oss. You shoul d con si der car eful l y w hether futur es or opti on s ar e appr opr i ate to your fi n an ci al si tuati on . You m ust r evi ew the custom er accoun t agr eem en t an d r i sk di scl osur e pr i or to establ i shi n g an accoun t. On l y r i sk capi tal shoul d be used w hen tr adi n g futur es or opti on s. In vestor s coul d l ose m or e than thei r i n i ti al i n vestm en t. Past r esul ts ar e n ot n ecessar i l y i n di cati ve of futur es r esul ts. The r i sk of l oss i n tr adi n g futur es or opti on s can be substan ti al , car eful l y con si der the i n her en t r i sk s of such an i n vestm en t i n l i ght of your fi n an ci al con di ti on . In for m ati on con tai n ed, vi ew ed, sen t or attached i s con si der ed a sol i ci tati on for busi n ess. To the best of our k n ow l edge, the i n for m ati on con tai n ed her ei n i s accur ate an d r el i abl e as of the date of publ i cati on ; how ever , w e do n ot assum e an y l i abi l i ty w hatsoever for the accur acy an d com pl eten ess of the above i n for m ati on . w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.comw w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com

9. Abou t Icon Alter n atives w w w .i con al ts.com (800) 376-0810 i n fo@i con al ts.com Sources http://www.npr.org/2016/09/21/494874964/the-big-reason-voters-like-trum p-clinton-theyre-not- the-other http://www.people-press.org/2016/09/21/in-their-own-words-why-voters-support-and-have- concerns-about-clinton-and-trum p/cam paign_1/ http://graphics.wsj.com /elections/2016/donald-trum p-and-hillary-clintons-popularity-problem / http://www.reuters.com /article/us-usa-election-clinton-em ails-idUSKCN0ZL1US http://observer.com /2016/07/wikileaks-proves-prim ary-was-rigged-dnc-underm ined- dem ocracy/ http://www.politico.com /m agazine/story/2016/09/hillary-clinton-em ails-2016-server-state- departm ent-fbi-214307 http://tim e.com /m oney/page/2016-presidential-election-clinton-trum p-affect-finances/ http://www.wsj.com /articles/SB123629969453946717 http://www.forbes.com /sites/janetnovack/2016/06/15/the-2016-investm ent-guide-election-proof- your-portfolio/#7e7e0c482a97 The story of Icon Alternatives is a one that m irrors the evolution of our industry. Em erging from careers in the pits to this exciting new world of electronics and autom ated strategy,Icon is the new breed for futures investm ent. As independent floor traders in the 80s then com m ittee heads for CM E to the last decade of Index Futures Group; we?ve been ahead of the curve since the early years of the brokerage business. As investm ent theory continues to change,Icon is positioned to provide investors true portfolio diversification while allowing traders access to the best tools available. Just like the capital m arkets them selves,the industry has had its fair share of peaks and valleys; and we?ve seen it all.

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