There is uncertainty abound about the future direction of the stock market heading into what many say is the most important presidential election of our lifetimes. A few days after the election our focus will probably quickly shift to the next Federal Reserve meeting on Nov. 7 and we'll realize it was just another election — and our place as the leading innovative country remains.
With all of this uncertainty in the meantime however, this creates opportunity. Where is the opportunity? In the elevated volatility levels that began in late September heading into the election. Who is the opportunity for? For investors who may have been left behind in an under-exposed portfolio position waiting for a pullback.
The S & P 500 made a new all-time high on September 18th (show in red). The Cboe Volatility Index (VIX in black) trades with an inverse relationship to the S & P 500. As the S & P 500 goes lower, people become fearful as they buy put option protection pushing the general level of option prices (both puts and calls) higher.
This creates the inverse relationship of VIX and S & P 500. The same inverse relationship does not work on the upside as fear is a much stronger emotion than greed. The stock market does not crash higher, right? So when the market is breaking out to new highs the demand for call options also increases pushing prices of options higher, but not to the same degree as a downside move.
As you can see the VIX is hanging around the 19-23 zone, which is elevated.
