Option Plays on the Election & Fiscal Cliff

Focus: OPTIONS

With just a month to go before the tight Presidential election race, the staff at BigTrends.com have been collecting trading ideas on how to play the election from various options traders.

Options traders in the US stock market are getting their bets in place in case the US economy tumbles down the "fiscal cliff," or worse, if the US Presidential election is so close that the result is disputed.

The stock market has been relatively calm in recent weeks in the face of uncertainty over the November 6 election and concerns that the economy could be pitched into a new recession because of substantial tax rises and government spending cuts—the so-called fiscal cliff—due to hit early next year unless Congress agrees to cancel or delay them.

Some option traders already are starting to build up protective positions on these big risks. In an environment of subdued volatility, the cost of doing so is relatively low, making it advantageous to take out insurance in case Washington remains gridlocked for an extended period after the election and the markets are roiled.

According to InTrade, current odds show President Barack Obama will be re-elected. [BigTrends.com: Currently 64% odds on Obama, however, that has dropped quite a bit since the 1st Presidential Debate] However, expectations are Republicans should maintain control of at least the House of Representatives and possibly gain marginal control of the Senate.

Republican presidential candidate Mitt Romney's strong performance against Obama in the first of three debates last Wednesday night has improved his odds, though not yet enough to put him ahead in the polls.

The biggest shock would be if the election was so close that there was a legal battle over who won, mirroring the struggle between George W.