Profit From Mid-Term Elections?

Hey Traders, MID-TERM ELECTION SLUMPS The market on Friday was enough to make anyone want to walk away and take a break unless you were on the correct side of the market meltdown. Well, remember 2018? President Trump was enjoying a soaring stock market from 2016 to 2018, but then it hit a wall in 2018 - at one point it gave up 18.8% of its gains. The Dow rose under the initial term of President Biden, but once again it’s hit a wall, giving up more than 12% this year. If you’re a fan of the concept of seasonality in the stock market, this table tells us that there’s potential for better times ahead. Median Annualzied Stock Market Returns Per Presidential Year (1900 - 2021) Prior to an election, politicians will use every available lever at their disposal to stimulate the economy, which is why, some theorize, the first year after an election has better returns than the second. The first half of year two is uncertain and more about governing and starting the battle for mid-term elections. It introduces uncertainty into the market. The second half of year two tends to be a bit stronger, relatively speaking, as politicians will once again do what they can to contribute to strong stock market returns in the hopes of re-election. Once the uncertainty of congressional elections is sorted out, Wall Street can move forward in year three. This year we’ve been hit with a myriad of things from inflation, interest rate hikes, pandemic exhaustion, supply chain issues, and a war in Ukraine. I’m not so sure we’ll bounce back and see any gain this year, but I certainly wouldn’t mind a bit of a second-half rally. We’ve already started to see the state of the economy as a talking point for the upcoming elections. Will that be enough to drive some sort of near-term rally? TRADE IDEA Agree Realty Corporation (ADC) is a REIT and offers a 3.77% annual dividend. It has increased revenue from $111.50 billion in 2017 to $339.30 billion in 2021. The Real Estate sector continues to be near the top of the 1-week and 1-month relative performance charts. If the sector remains strong, ADC has the potential to benefit. The weekly chart below shows resistance at the $70 level, but it broke through that level last week and finished at $72.14. Not only did it finish up last week, it actually finished up on Friday, while the SP500 was down over 2.5%. There’s resistance at last year’s high of $75. MARKETS Unless you were net bearish last week, there wasn’t much that you could do. Real Estate was the lone positive sector. Even the cryptos struggled last week. But one week does not make a market. Consumer Defensive, Real Estate, and Utilities are still strong on the 1-month and 3-months charts. TRADING EDUCATION We’re going to get into user-submission questions this week, but first, we’re going to start off the week by talking about calendar spreads. A calendar spread is entered by simultaneously entering a long and short option position at the same strike price, but with different expiration dates. In a typical calendar spread, you buy a longer-term contract and sell a shorter-term contract. You are left with a risk profile that looks like a tent. Your maximum gain occurs when the stock finishes at the strike price you selected. This strategy makes money with the time decay of the short option or with an increase in volatility. For example, the picture below shows an NVDA calendar using the following options: Buy - May 20, 2022, $195 put @ $13.78 Sell - Apr 29, 2022, $195 put @ 7.80 The net debit of the position is $5.98 (debit of $13.78 minus the $7.80 credit). Note that you can do this trade with calls or puts but either way you profit when the stock doesn’t move. Unlike other strategies, entering a calendar with puts doesn’t make it a bearish strategy. Likewise, a calendar using calls doesn’t make it a bullish strategy. A calendar is a delta-neutral strategy. If you are overall bullish on a stock, but believe it’s going sidewise for a week or two, using a calendar is a great way to reduce your cost basis on the longer option position. Let’s say you’re bullish on a stock, you can buy a calendar using calls. If the stock moves sideways and the short option expires worthless, you’re then left with a long call position. Buying the calendar and collecting the premium can reduce the cost of purchasing a longer-term call option outright. Calendars can be a great way to reduce your cost basis on a long-term LEAP option. You can also set up calendars at areas of support or resistance. I mentioned in the Trade Idea section that ADC has resistance at $75, but the stock is moving up. You can create a calendar spread at $75 so that as the stock moves up, it heads into your max profit zone of the calendar spread. If you have any questions, comments, or anything we can help with, reach us at any time. 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