Profiting from Politics

11/14/2013 6:00 am EST

Focus: OPTIONS

James Bittman

Senior Instructor, Chicago Board Options Exchange

With the debt ceiling and budget impasse in Washington dominating headlines, Jim Bittman says that it's important for traders to stay nimble to profit and he shares some tips.

SPEAKER 1: Well, for traders and investors, one of the things in the news they are always watching these days is the budget impasse, debt ceiling, all of these geopolitical things that are going on right now.  My guest today is Jim Bittman to talk about that so, Jim, we have a lot of things going on that have nothing to do with technical analysis that traders are watching right now because of the effect on the market.  What are your thoughts?

JIM BITTMAN:  Well, you know, that is the question that is on everybody’s mind and this is where a trader has to be nimble, okay.  You know you have to go in to any event, whether it is an earnings announcement or a budget impasse or an employment report, you have to go in with an opinion and you have to trade that opinion and you have to have a stop loss because all of us are wrong a large percentage of the time.  I believe that the budget impasse and the debt ceiling will be resolved and that will cause at least a short-term bounce in the market.  The whole question is is what will happen after that short-term bounce and so that is where a trader has to be nimble.  If you have a good quality portfolio and the market bounces, that would be the time to sell some covered costs because if the market then stops and goes back down, you have brought in some great premium.  If the market continues up, then that euphoria that bought the calls, that drove the volatility level up, even if the market slows down and then continues to rise, you are going to lose a little in those calls but not a lot, so I think there is great risk/reward ratio in selling covered calls after the market pop, assuming that happens.

SPEAKER 1: One of the great things about options, of course, is that you can play this with a spread or a strangle and straddle, and whichever way it moves, as long as it moves one way, you make money.  What about the idea of I know, whether it is resolved or not, the market is going to react pretty significantly to that so how do I profit from that?

JIM BITTMAN:  Well, that is where trading instincts come in because right now, the straddles are pricing in a bigger move than we have seen recently so if we have an even bigger move, then those straddles will go up more in price.  If we have the move they are predicting, the straddles won’t make any money.  If the market doesn’t move because this is already priced in, then those straddles will lose you significant money so, regarding the budget impasse, the straddles on indexes right now are a very dangerous trade. 

SPEAKER 1:  All right, give us an example of a straddle.  What is a straddle?

JIM BITTMAN:  Well, with the S&P 500 at 1680, a straddle would be buying a 1680 put and a 1680 call, and then you have to choose the expiration date.  There are many components to the problem.  It is not for beginners.

SPEAKER 1:  The expiration date is important, right, because if this is solved or if something happens in the next 10 days or two weeks, whatever, maybe the movement happened and you miss it or it is too soon or too late.

JIM BITTMAN:  Absolutely. I mean if you buy a one-week straddle and the resolution doesn’t happen for two weeks, well you are not going to make it.

SPEAKER 1: So, if I go 30 days out, is that you think sufficient time?

JIM BITTMAN  Well, I would think so but that doesn’t mean I am right.  I am going to be just as wrong on that one as many people.

SPEAKER 1: Jim, thanks for your time.

JIM BITTMAN:  Glad to be here, Tim.

SPEAKER 1:  You are watching the MoneyShow.com video network. 

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