The Election Hedge: A Guide to Tactical Risk Management

T H E E L E C T I O N

H E D G E

A GU IDE TO TACTICAL RISK M ANAGEM ENT

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Jack Bogle, Founder of Vanguard, cal ls our cur rent elect ion cycle ?the m ost chaotic wi th in m em ory?. And that?s hardly just one m an?s opin ion. Exper ts, analysts and pundits al ike agree that what we?re seeing on the cam paign tr ai l has never occur red before, and l ikely won?t occur again. Chaot i c isn?t just color com m entary.

W H A T 'S T H E W O R R Y ?

Fun Facts:

The FBI is st i l l r eleasing in form ation regarding Cl in ton?s ?ext r em el y car el ess? m ethods of han d l i n g cl assi f i ed i n for m at i on .

Trum p doesn ?t con si der Sen . John M cCai n a w ar her o because he was captured.

Debbie W asserm an Schul ts, chairwom an of the Dem ocrat ic National Convention, steps down am idst al legat ions of r i ggi n g the dem ocr at i c pr i m ar y i n H i l l ar y Cl i n ton ?s favor . She was subsequently h ir ed as co-chair of Cl in ton cam paign.

Trum p is on the th i r d cam pai gn m an ager i n fou r m on ths.

To be con t i n ued ...

(sources on page 8)

N O N E E D T O

O V E R R E A C T

On M arch 6th, 2009, Standford professor M ichael Bosk in argued that Obam a's pol icies - m arked by h igher spending, taxes and regulat ions - we'r e "k i l l ing the Dow." I f you were fear fu l , th is insight fr om a respected econom ist m ight have rein for ced your incl inat ion to sel l .

And M arch 6th, i t turned out, was about the absolute low point of the bear m arket in 2009. I f you let th is warn ing send you to the sidelines, you would

have m issed out on m ore than 11,000 Dow points.

"M uch of the r epubl i can par ty can 't stan d the Republ i can can d i date an d m uch of Dem ocr at i c par ty can 't stan d the Dem ocr at i c Can d i date," says Ar n ot t of Resear ch Af f i l i ates.

Though he coun sel s "agai n st over r eact i n g or t r y i n g to over th i n k the i m pl i cat i on s of the el ect i on ."

Let's take a look back...

W e have said for years throughout var ious turbulent t im es, the biggest r isk to one's por t fol io is the capi tal si t t ing on the sidel ines.

Even i f we were concerned of a large sel l off, gett ing out of the m arket ent i r ely would NEVER have been appropr iate advice. The r ight m ove would be to m anage r isk and protect your exposure in tel l igent ly.

Tact ical r isk m anagem ent is top pr ior i ty, especial ly when expect ing a m ajor event.


it would EXACERBATE volatility

Ji m Ober w ei sPr esi den t , Ober w ei s M an agem en t

M ar i l yn CohenCEO, En v i si on Capi tal M an agem en t

not a massacre... just a selloff

A. Gar y Sh i l l i n gPr esi den t , A. Gar y Sch i l l i n g & Co.

expect massive fiscal stimulus

Rob Ar n ot tCEO, Resear ch Af f i l i ates

a continuation of the status quo

SO W H A T 'S G O I N G

T O H A P P E N ?


Di ver si f i cat i on an d Ri sk M an agem en t

There is absolutely no way to predict the outcom e of th is elect ion. And there's no way to predict how the m arket is going to r eact to whatever the outcom e is. W hether you are hedging a r et i r em ent account or speculat ing in the stock m arket, due di l igence suggests to have a str ategy in place before the m arket r eacts.

A N D T H E A N SW E R I S...

W hen hedging a posi t ion, i t?s im por tant to understand your tr ue exposure.

W ith respect to th is theatr ical cam paign, i t?s reasonable to assum e that the m arket m ay have an equal ly dram atic r eact ion to the outcom e. H owever , the dir ect ion is uncer tain . And how you hedge wi l l depend on your cur rent posi t ion.

Consider ing the need to protect your cur rent investm ent por t fol io, l ikely a ret i r em ent account...


The m ost com m on scen ar i o w ou l d be the desi r e to hedge agai n st the stock m ar k et tan k i n g. Th i s i s r ather si m pl e.

H ED G I N G T H ED O W N SI D E

SP500

M M M (3M Com pany)FDX (FedEx Corporat ion)SPLS (Staples Inc.)CAT (Catepi l lar Inc.)H OG (H ar ley-Davidson)

Dow Jon es

H D (H om e Depot)KO (Coca-Cola)GE (General Electr ic)M CD (M cDonalds)DIS (W alt Disney)

Russel l

NTGR (Netgear )DF (Dean Foods)BW LD (Buffalo W ild W ings)BNCN (Bank Corp.)TREE (Lending Tree)

NASDAQ

M SFT (M icrosoft Corp.)FB (Facebook Inc.)INTC (In tel Corp.)AAPL (Apple Inc.)GOOG (Alphabet Inc/ Google Inc.)

Fir st, determ ine which index or indexes your stock por tfol io r epresents.

Second, calculate how m any Futures contracts is needed to r epresent the fu l l value.

Third, sel l that m any futures or buy that m any put opt ions.

Four th, r est easy.

EXAM PLE:Your cur rent por t fol io is $1,000,000 and consists of com panies in the S&P500.

Cur rent M arket Pr ice for Decem ber E-m i n i S&P 500 is cur rent ly near 2160.00.

W ith a contract size of $50 x the In dex . This means, that ON E contr act represents $108,000 of your por tfolio.

(2160 x $50 = 108,000)

To hedge your ent i r e $1,000,000 por t fol i o: A proper hedge for stock with in the S&P would require ei ther :

- the sale of 10 contracts of E-m in i S&P 500 futures, or

- buying 10 E-m in i Put opt ions

Major Companies by Index

Next Page for Maintaining Upside Exposure > >


On the f l ip side, som e investor s are so ter r i f ied of what m ay happen that they have al r eady l iquidated al l posi t ions and pul l out of al l investm ents. This el im inates al l r isk to the downside, but also rem oves the possibi l i ty of any gains should the m arket r al ly. To achieve th is, there are a num ber of possibi l i t ies. They vary in how m uch r isk is taken, how m uch potent ial profi t is avai lable, and how act ive you want the str ategy to be. There is no r ight answer.

W e?l l look at Decem ber opt ions that expire 12/16 and wi l l take you through the elect ion.

This str ategy wi l l l ikely enable you to get your posi t ion closer to the cur rent m arket pr ice. You wouldn?t need as big of a m ove as str ategy 1. The downside is that your profi t potent ial is capped at your top str ike (less com m ission/ fees paid)

This would leave you with open ended profi t potent ial (less prem ium / fees paid). Downside is that the Cal ls would be expensive and the m arket would need a big m ove up to m ake i t wor thwhi le.

This str ategy would enable you to get an at-the-m oney spread and offset som e or al l of the up-fr ont cost by sel l ing a Put beneath. The downside to th is is again your profi t potent ial is capped but you wi l l also have r isk with a sel l off below the Put str ike you sold. But, r isk could potent ial ly be m it igated by buying a Put in fr ont of your Put str ike you in i t ial ly sold. This would incur an addi t ional cost but would l im it your r isk .

D O N 'T W A N T T O M I SS O U T

W eek 1 and/or W eek 2 opt ions can be fair ly cheap for near the m oney Cal ls. This would al low you to adjust your str ike week to week to always be near the m oney and would be poised for an unexpected m ove. The beauty of these shor t term opt ions is that i f the m arket r al l ies ear ly, you don?t have to spend any m ore prem ium to get long. This would require fr equent attent ion, and you would have to m ake sure you buy another Cal l before the other expires.

OPTION 1) Buy out of the money December E-mini S&P Calls:

OPTION 2) Buy a December E-mini S&P Call spread:

OPTION 3) Buy a December E-mini S&P Call spread and Sell an out of the money Put:

OPTION 4) Buy December Weekly E-mini S&P Calls


D on 't w ai t f or th e elect i on .

A l ot of m on ey w i l l be m ade an d l ost i n the n ext coupl e of m on ths. Star t tak i n g appr opr i ate steps n ow to r educe por t fol i o r i sk an d poten t i al l y tak e advan tage of vol at i l i ty.

Risk Disclaimer and Disclosure Statement

The v i ew s expr essed i n th i s ar t i cl e ar e those of the au thor (s) i n d i v i dual l y. Th i s ar t i cl e has been w r i t ten an d publ i shed for i n for m at i on al pu r poses on l y an d

shou l d n ot be con st r ued as speci f i c i n vestm en t adv i ce.

Tr ad i n g fu tu r es an d opt i on s i n vol ves the r i sk of l oss. You shou l d con si der car efu l l y w hether fu tu r es or opt i on s ar e appr opr i ate to you r f i n an ci al si tuat i on . You m ust r ev i ew the custom er accoun t agr eem en t an d r i sk d i scl osu r e pr i or to establ i sh i n g an accoun t . On l y r i sk capi tal shou l d be used w hen t r ad i n g fu tu r es or opt i on s. In vestor s cou l d l ose m or e than thei r i n i t i al i n vestm en t . Past r esu l ts

ar e n ot n ecessar i l y i n d i cat i ve of fu tu r es r esu l ts. The r i sk of l oss i n t r ad i n g fu tu r es or opt i on s can be substan t i al , car efu l l y con si der the i n her en t r i sk s of

such an i n vestm en t i n l i gh t of you r f i n an ci al con d i t i on . In for m at i on con tai n ed , v i ew ed , sen t or at tached i s con si der ed a sol i ci tat i on for busi n ess.

To the best of ou r k n ow l edge, the i n for m at i on con tai n ed her ei n i s accu r ate an d r el i abl e as of the date of publ i cat i on ; how ever , w e do n ot assum e an y

l i abi l i ty w hatsoever for the accu r acy an d com pl eten ess of the above i n for m at i on .

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A bou t I con A l ter n at i ves


Sources

http:/ /www.npr.org/2016/09/21/494874964/ the-big-reason-voter s-l ike-tr um p-cl in ton-theyre-not-the-other

http:/ /www.people-press.org/2016/09/21/ in-their -own-words-why-voter s-suppor t-and-have-concerns-about-cl in ton-and-tr um p/cam paign_1/

http:/ / graphics.wsj.com /elect ions/2016/donald-tr um p-and-hi l lar y-cl in tons-popular i ty-problem /

http:/ /www.reuter s.com /ar t icle/us-usa-elect ion-cl in ton-em ai ls-idUSKCN0ZL1US

http:/ / observer.com /2016/07/wik i leaks-proves-pr im ary-was-r igged-dnc-underm ined-dem ocracy/

http:/ /www.pol i t ico.com /m agazine/ stor y/2016/09/h i l lar y-cl in ton-em ai ls-2016-server -state-depar tm ent-fbi-214307

http:/ / t im e.com /m oney/page/2016-president ial -elect ion-cl in ton-tr um p-affect-f inances/

http:/ /www.wsj.com /ar t icles/SB123629969453946717

http:/ /www.forbes.com /si tes/ janetnovack /2016/06/15/ the-2016-investm ent-guide-elect ion-proof-your -por tfol io/ #7e7e0c482a97

The stor y of Icon Al ternat ives is a one that m ir ror s the evolut ion of our industr y.

Em erging fr om careers in the pi ts to th is exci t ing new wor ld of electron ics and autom ated str ategy, Icon is the new breed for futures investm ent.

As independent f loor tr aders in the 80s then com m ittee heads for CM E to the last decade of Index Futures Group; we?ve been ahead of the curve since the ear ly years of the brokerage business.

As investm ent theory cont inues to change, Icon is posi t ioned to provide investor s tr ue por tfol io diversi f icat ion whi le al lowing tr aders access to the best tools avai lable.

Just l ike the capi tal m arkets them selves, the industr y has had i ts fair share of peaks and val leys; and we?ve seen i t al l .

Economy & Finance

The Election Hedge: A Guide to Tactical Risk Management