One of the doomsday scenarios promoted by my Facebook friends is that the election of OrangeHitler (a.k.a. Trump) will cause an economic collapse, a stock market collapse, and a U.S. currency collapse. If we ignore the most dire predictions of a worldwide economic collapse, but assume they’re right about dollar-denominated stuff, what’s the best way to hedge against this possibility?
Let’s assume that Trump being elected dictator causes a typical basket of U.S. assets (stocks, real estate, etc.) to fall by 20 percent and that the S&P 500 tracks this as well as anything.
Assume that a Millionaire for Hillary has $5 million in assets (the house in Cambridge, Brookline, or Berkeley; stock portfolio; dollar-denominated pension and Social Security entitlements). A 20-percent fall in the value of these assets needs to be counterbalanced by a $1 million profit.
What’s the most efficient way to buy protection? A betting site shows Donald Trump paying out at 5/2. So a bet that would pay $1 million would cost $400,000, right? That seems excessive.
What about an S&P put option priced at 15 percent below the current S&P value? The option expires after a week and we buy enough that a 20-percent drop in the index results in a $1 million profit. This is where I need help from readers! What is actually the most efficient way to do this and what is the current price?
[Note that I’m asking for “my friends”; I think the market will go up about 2-3 percent after the election, whoever wins, due to the removal of uncertainty. If Trump is elected, rich investors can celebrate having someone in the White House who advocates for lower tax rates (not that Congress needs to listen). If Clinton is elected and the slow-per-capita-growth-but-high-immigration expanding Welfare State is continued, rich investors will still do fine because the S&P 500 can grow based on (a) foreign countries getting richer per capita, and (b) the U.S. being stuffed with more consumers via immigration. One of the reasons that there is a Trump v. Clinton divide in this country is that people who work at Apple or own Apple shares can prosper even as the U.S. stagnates. 62 percent of Apple’s revenue is from outside the U.S. (fourth quarter results). A voter who is living paycheck-to-paycheck actually does need for America to become great again (in GDP growth) in order to be wealthier; a voter with substantial assets can buy growth from Singapore, India, China, Korea, Taiwan, et al., even without doing anything more exotic than buying the S&P 500. I don’t need insurance against future U.S. economic stagnation because I get it by owning Apple and Google stock (indirectly through a Vanguard fund) as well as by owning foreign stocks.]
The current level of SPY — an ETF that tracks the S&P 500 — is $208.55. So, the strike price for an (approximately) 15% out of the money put option would be $177. The last trade price for these options was $0.10 per share (note that I’m writing this on Sunday, so the market is currently closed). So, if the market were to drop 20%, you would make $1016 per options contract (which is based on 100 shares) at a cost of $10 (100 x $0.10) per contract.
So, to make a $1,000,000 profit, you would need approximately 1000 contracts at a cost of about $10,000.
The prior post refers to options expiring on November 11th, 2016.
Buy gold … or a gold ETF.
Buying ammo (not guns) is easy to do in all states and doesn’t make you automatically evil. And ammo (so far since 2008) has never gone down in value – it contains both a labor component and a basic commodities (the material used to make a bullet) component – so it should always track inflation. If Hillary wins, expect ammo to spike in price.
paddy, unless Phil already has an FID or LTC, there’s no way he can buy ammo in MA before the election. The absolute fastest I’ve ever seen an LTC turned around was just under 3 weeks.
For someone with a net worth of $5m (High Earner Not Rich Yet), a large chunk of that would be in Cambridge real estate, doesn’t make sense to hedge that with equities or any typical instruments in the capital markets. The rest maybe $1-$2M in stock/bond investments is most likely in very liquid instruments such as SPY/Vanguard/etc with a good chunk of that in tax free 401k plan. If you are worried about a 20% drop, why not just sell the whole portfolio and buy it back after election? You won’t incur a capital gain in 401k, your portfolio is not big enough to move the market, and transaction cost/spread of your holdings are likely to be minimal. Much cheaper than dealing with options and other “clever” hedges.
The thousand-buck options for the win. If it pays off, you also win every cocktail party palaver for years. If it doesn’t, you don’t even have to tell the wife.
whoops, ten thousand bucks is in option-pain territory.
The 180 strike (currently 15% out of the money) expiring on 11/11/16 is only $0.03 per share ($3.00 per contract today), so you can put on your hedge for just $3,000 now.
“If Trump is elected, rich investors can celebrate having someone in the White House who advocates for lower tax rates”
Comey’s latest announcement provided a quick test of this prediction. Reuters: Stocks surge as FBI decision lifts cloud over Clinton’s campaign.
Joe Harris’s advice seems pretty good to me.
So what’s going on? Why wouldn’t the prospect of unified Republican control of the White House and Congress be electrifying US markets, instead of scaring them? Won’t reducing taxes to Singaporean levels lead to amazing levels of economic growth? No. This is the “government as consumer” fallacy. Taxation and spending is basically a form of collective shopping. For some goods (food, clothing) it makes no sense to buy them collectively. For others (roads, insurance) it does make sense.
Joseph Heath, Economics Without Illusions:
Trump’s belief that high tariffs and import substitution (as practiced by India in the 1950s and 1960s) will lead to economic growth is based on an even more egregious fallacy.
Okay, I just followed Joe Harris’s advice and bought 100 SPY put options, strike price $180, expiry 11/11, for $300. (We’re not as rich as the Millionaires for Hillary, so we don’t need as much insurance.)
I would probably go with a leveraged S&P 500 fund like SDS:
http://www.proshares.com/funds/sds.html
Jeff, thanks for that, I was not aware that MA was so strict in ammo purchases. Crazy to consider it is where “the shot heard round the world” occurred.