Trading Options on a Government Shutdown
Times when the stock market is volatile are commonly good times for stock options trading. Now as political infighting in Washington drives us closer to a government shutdown the markets are volatile. Buying puts or calls on stocks may be quite profitable. The rationale for trading options on a government shutdown is that no one is really sure how long a shutdown would last. The amount of damage to the economy is measurable if things are settled in a couple of weeks. But, if congress cannot come to agreement on a budget and on increasing the debt ceiling the economy could be damaged. Remember that we are still feeling the effects of the worst recession in seventy-five years. According to economists shutting down the government will reduce GDP by half a percent per month for up to a month. If it goes on longer things will get worse. What is the best style of options trading in this situation? The good parts of trading options on a government shutdown are that a trader can limit any losses to the price of an options contract while leveraging his trading capital.
What Does Experience Tell about Trading Options on a Government Shutdown?
Nearly twenty years ago the US government shut down for two weeks. The stock market (S&P 500) fell four percent but jumped up ten percent when a deal was made to resume operations as normal. When debt default loomed in 2001 the market fell fifteen percent but made up the losses over the next six months. For the options trader timing is important. For those who would like to profit from the market turbulence and trade options on a government shutdown a long straddle could be an ideal strategy.