A rush of D.C. drama is keeping investors on their toes — a USMCA deal between House Democrats and the White House, articles of impeachment against President Donald Trump, and the potential for Dec. 15 tariffs to be delayed.
MCEF Capital portfolio manager Scott Banerjee sees even more headwinds not priced into the market that could rock Wall Street.
"In addition to the obvious, the ECB meeting on Thursday morning and then as we get through the weekend, whether there's a China trade deal or not, there's also positioning risk related to sentiment," Banerjee said on CNBC's "Trading Nation" on Tuesday.
Banerjee says excessive optimism among investors could mean markets are underappreciating the risks heading into the new year.
"Some potential 2020 risks — hedge fund crowding in certain factors and sectors — [and] another one is required distributions for senior assets, which is government mandated, which could bring supply to the market," he said.
He plans to hedge against increased volatility as markets absorb those shocks by employing a put spread strategy.
"I'm not looking for a huge pullback, but if you want to protect your existing long portfolio, one trade you could put on is a December 31 SPY put spread at the 310 and 304 strikes. Essentially, this gives you protection against a similar pullback that we had last week," said Banerjee.
Stocks sold off at the beginning of the month on worries a trade deal between the U.S. and China could take far longer than expected. At its worst, the SPY S&P 500 ETF declined 2.6% from a peak in late November to a trough on Dec. 3.
Banerjee's put spread strategy protects his portfolio should the SPY ETF fall to as low as $304 by Dec. 31 expiration.
