Following Friday and the FBIs decision to re-open the case on Hilary I have decided I am going to assume A Trump win, this is for several reasons:
1) After reading into it, the reopening of the FBI case implies one of three things imo - 1. They have found new significant information that can or will see Hilary odds come under-pressure if not ruled out entirely. 2. A third party (wiki leaks or Russia etc) has obtained information regarding that matter that will be used against Hilary. 3. The FBI Chief fancies his 2 minutes of fame.
- In terms of likelihoods, 1 is perhaps the most likely - I find the timing of the reopening the most damning argument for there being some real anti-hilary firepower, given it is within the FBIs discretion to reopen the case now, surely if it wasnt that important they could wait until after? Of course this may be questionable integrity but equally some may argue they should have done so to stay neutral. However, perhaps most interestingly, the timing AND the fact the FBI have been pro Hilary in the past also gives weight to number 2 - where the FBI have had their hnd forced e.g. if a 3rd party does indeed have some relevant information the FBI perhaps dont want to be seen as incompetent and thus want to get infront of the news. The timing also supports argument 2 since it is a bit of a shock announcement and thus it could be a 3rd party forcing their hand. On the other hand some may question why a 3rd party would notify the FBI and not just release it. Finally, 3 as is the case in most public situations, it is possible and it is the US after all. however, an argument against this is the fact the FBI have been pro Hilary so its unlikely this would only happen for fame.
- If it is any of the 2 above and information that could write Hilary off as a candidate, of course positioning for Trump make sense. especially when the market is very very short trump here. Since Friday Trump has lost half of his gains to trade currently at 23% up from 18% but down from 27%, these are odds i like to start adding some length for trump.
1) Recent official polls of 1000-2000 are a lot tighter than i expected and are certainly imply much longer odds for Trump. However the main decider for this variable is that an unofficial online poll of 1,000,000 shows trump trading at 526652 with Hilary lagging down at 253024, putting trump up at 60% and Hilary down at 30%. I saw an unofficial poll for brexit which had 700,000 respondents with 70% for leave and 30% remain and we know what happened there. IMO data rules, 1000 isnt enough to be representable there is too much sampling error. In conjucntion with this I feel there will be alot of closet trump voters.
1) Pricing - As mentioned previously, the market is very short trump and too long Hilary here with the above considered. Odds only at 23%, the VIX only at average levels, the MXN and USD are bid up 10 and 4% in recent weeks respectively and the SPX still in a bull range (not to mention safe havens which are trading relatively soft). Thus the fact that the market is pricing trump premium so low it looks like there is certainly some topside to be had. If the markets were stretched and closer to 50/50 of course such trades might not make as much sense from a r:r perspective. But trump is potentially at least 2x cheap, there are positions to be made that can offer 1:2-4 risk reward. Further, the positions used do not necessairly need a trump win to hit targets - given the volatility regarding the FBI probe plus trumps ability to possibly win big contested states on the day (but not necessarily win), either or both i think will be enough to realise volatility to a level that hits some targets given how short the market is on trump it leaves a lot of topside run way - we only need to get one of the above risk events right in the next 10 days (at any time) and this is likely to see trump odds bid and hit targets.
2) Macro - Further being long vol is also supported by the slew of central bank meetings this week. Whilst i dont expect much change (BOJ most likely to change - a 5-10bps cut in rates but still unlikely), still it makes sense to own vol here through the FED BOJ BOE RBA.
1. Short SPX @mrkt - Target 2115, 2005, 2075 - whilst owning vol, being short SPX makes sense at these stretched levels, particularly as we move close to a potential hike. A trump win will see us trade through 2000TP, whilst a tick higher we can set our targets at 2105/15TP before 2075TP and 2055TP.
2. Long VIX @mrkt - Target 20 and 24 - vol is currently trading flat at the 1,2,5yr MA and the 2yr linreg (whilst we are bid above the 1 and 5yr regression quite significantly). Last week was a better place to be a buyer back at 12.50, nonetheless, in comparison to recent spikes we still have 400bps of topside to sept highs at 20 which is a good 25% to be paid, before 24/5 and some 50% higher with 30 75%. 20 should be the intermediate target (comparable to 2000-2075 in SPX) , and 24/5 to 30 Trump winning target.
*These positions in SPX and Vol make more sense too as I am happy to be a buyer/ seller here anyway given cheapness and how stretched i believe equities are - the election event is a bonus- hence I I am not positioning early for the election in FX as MXN, USD, JPY arent at relatively favourable levels and still could move considerably against long trump and too risky.