Recent polls show Donald Trump catching up to Hillary Clinton in a handful of battleground states, and with the election results becoming increasingly uncertain, it could be time for investors to review their portfolios.
Neil Azous, founder of Rareview Macro, suggested in a note on Thursday that investors should use options to hedge against a possible Donald Trump win. In Azous' view, the narrowing gap between the Republican and Democratic candidates and Trump's entire campaign have contributed to a lot of uncertainty for the markets that shouldn't be taken lightly.
While options prices are currently low, indicating moderate interest in hedging, Azous believes that "people are going to have to adjust their portfolios" especially as market forecasters can't necessarily predict the outcome, as shown with the surprise outcome for the Brexit vote. Hence, implied volatility could be priced too low going into this uncertain of a U.S. election, a statement that Harvest Volatility Management partner Dennis Davitt addressed Thursday on CNBC's "Trading Nation."
"Ignoring the political about who wins, from the volatility view, uncertainty is something the markets do not like, and who knows where the polls are going to be," said Davitt.
"Buy puts if you want to hold on to your stocks, or sell your stocks and buy calls," he added. "With the VIX below 15, I think any sort of options buy going into this election is going to be one that will save you money."
An NBC News/Wall Street Journal/Marist poll released earlier this week had Trump and Clinton running close in Ohio and Iowa. But a new poll released Friday still has Clinton leading in key states like Colorado, Florida and North Carolina, where Trump trails Clinton by around 6 to 8 percent.
Erin Gibbs, equity chief investment officer at S&P Global, also favors buying put options (which increase in value as stocks slide) ahead of the election, but cautions investors that the timing of the puts they buy will matter.
"We looked at the past 11 elections, and the average return of the period in between the election date and the SPY expiration date for November had an average return of negative 1.25 percent," she said. "Five out of those 11 times was more than a 4 percent decline, so I think maybe buying some sort of put that will protect you around 4 percent would be a reasonable expectation."
"Don't bother with the December puts, because by then, the Santa Claus rally typically takes place, and the market is usually back up and has completely recovered," she added.
In addition to gaining in the polls, Trump has also selected Indiana governor Mike Pence as his pick for vice president. Azous had also been watching Trump's vice presidential selection carefully, as he believed that going with Pence would be the Republican nominee's "first real demonstration of something presidential."
