2 weeks Ago
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 when you compare it to a stock market at all-time highs. When volatility levels are higher, investor anxiety is high, which means option premiums are high because people are buying protection. We can use this to our advantage if we want to accumulate stock positions.
FOMO stocks If I had to guess, the stock that investors have the biggest FOMO (fear of missing out) is Nvidia (NVDA) . NVDA is in a strong uptrend and is showing mid-range volatility levels of its own. Earnings on NVDA are Nov 20, well after the election and the next Fed event so volatility levels are likely to remain elevated heading into earnings.
All the other 'Magnificent 7' names will have reported earnings before the election, which brings in a market dynamic called "IV crush" or implied volatility crush. Apple, META, Google, etc will all see IV drops the day following their earnings release, regardless of the outcome, and will work against the purposes of this trade. NVDA has a mid-range volatility and uptrend support just below us.
Should there be any kind of market pullback following the election, you can use this opportunity to accumulate a position in NVDA. Turning to the daily chart you'll see an intersection of blue dashed trendlines carving a zone of support around the $123 zone. Looking at the NVDA options that expire on Nov 22nd, just after earnings, they have the highest implied volatility.
The $123 strike puts are trading for $2.40, which means if you sold those cash-secured puts, NVDA drops below that level and you were 'put the stock', your effective entry cost on NVDA is $123-$2.40 = $120.
60. This is a way to take advantage of high volatility levels in the broader markets pre-election, as well as elevated volatility in NVDA heading into earnings. Once we get through the election and the Fed meeting we'll realize the sky was not falling and we're still the leading innovative and market value-creating country in the world.
Our markets can then go back to their previously scheduled AI-fueled innovation boom with your newly accumulated position in NVDA that you bought as a discount making a new high. -Todd Gordon, Founder of Inside Edge Capital, LLC DISCLOSURES: (Gordon owns NVDA personally and in his wealth management company Inside Edge Capital. Charts shown are MotiveWave and Schwab.
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