Health Care Reform: The "Obama Factor"
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Health Care Reform: The "Obama Factor"

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Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund ...

Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

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Health Care Reform: The "Obama Factor" Health Care Reform: The "Obama Factor" Document Transcript

  • U.S. Listed Options Sales Thursday, August 27, 2009 Market CommentaryRyan Renicker, CFA(646) 557-7999 Health Care Reform:John Martin(646) 557-7724 The “Obama Factor” High Risk Expectations for Health Care Figure 1: Health Care Risk Expectations VERY HIGH The options market is currently pricing in very high risk expectations for the Health Care Select Sector SPDR fund (XLV). In fact, the XLV 2-month implied – 22 trading day realized volatility spread is more than 2 standard deviations above its 2 year average. Moreover, XLV implied volatility is currently trading rich relative to the implied volatility for the S&P500 (SPY). Since Congress missed President Obama’s deadline to pass-care legislation before Congress’ August recess, and since this timeline continues to be extended (now yearend target), we believe XLV options expiring in October are overpriced. Source: Bloomberg, Newedge Options Sales. The Obama Factor: A Negative? Figure 2: Obama Approval Rating vs. Health Care Performanc It appears that investors are wary about Health Care Reform as it pertains to health care stocks. We plot President Obama’s approval rating 106 12% alongside the relative performance of the XLV vs. Correlation: - 40% the SPY (long XLV / short SPY) and find that there is 104 8% a distinct negative correlation between the two (Figure 2). That is, when Obama’s approval rating R e la tiv e P e rfo rm a n c e 4% declines, XLV tends to outperform the market (and 102 A p p ro v a l R a tin g vice versa). 0% 100 We believe this trend is likely to persist until the -4% debate over Health Care Reform is finalized. However, we also believe that the magnitude of 98 the impact this “Obama Factor” is likely to have -8% on the XLV is likely to be much more pronounced 96 as the fate of Health Care Reform is clarified, -12% likely transpiring after this October’s option expiry. 94 -16% Consider selling XLV Oct. 28/29 strangles for 06/02/09 06/23/09 07/15/09 8/5/09 8/26/09 about $1.20. Make money if XLV trades "Strongly Approve" - "Strongly Disapprove" Long XLV - Short SPY between $26.80 - $30.20 at expiry. XLV last traded below $27 more than 1 month ago and has not traded above $30 since last September. Source: Bloomberg, Rasmussen Reports, Newedge Options Sales.