Hedging Bullish Positions to Reduce Portfolio Risks as Market Plunges

The stock market sold off today after $SPX could not break above the 2400 level in the last 2.5 months while $VIX dropped to historical low level for a couple of weeks. In about half a day, SPX erased all the gains after the French electionresult day as describe in my post and fell below 50 day moving average with huge volume.

While the headline news was political concerns about US president, the technical analysis of the market trend did signal a major weakness of the market. All of the stocks discussed in my blog expressed signs of weakness as well.

So, I hedged all long positions with short calls at Wall Street noon time with the exception of EPI which does not have sufficient option liquidity. The short calls had Delta from 0.28 to 0.35, with In-The-Money expiration probability around 30%.

Here’s the list of short calls for the recent long stock call options.

Stock	Short Calls	Prices	Notes
NFLX	June 9 $162.5	$1.63
EEM	June 9 $42	$0.27
PVH	September 15 $95	$8.60	Closed position
MU	June 9 $30.5	$0.34	Sold 2 days ago

At the time when I was trading, PVH was trading below its 50 day moving average but above my stop loss point $97.79 (as described in my post Trading chart pattern from a bull flag turning to a high base with diagonal spread) after bouncing back from below it. Since it was the weakest stock in my portfolio, I just sold the September 15 $95 Call to close the position for $8.60 (close to middle price) which got filled immediately. As with other stocks, it resumed plunging after Wall Street’s lunch time and it broke below my stop loss point by the end of the day.

For MU which entered into a diagonal spread a couple of days ago, I did not roll down the short call on MU since the option price did not reach 1/3^rd of the initial premium at the time.

Another better hot stock NFLX had a good advance, but seemed to pull back in the last few days. It fell 2% when I sold its June 09 call at strike $162.5.

Overall, it was a busy day for me as a part time trader, since it took me about 1 hour to complete all the trades. I also hedged my longer term bullish positions on SPY & QQQ call options with short calls. These positions were entered before the initial French Election result on April 24 and were not posted in the blog. I plan to provide some summary in the future about these longer term trades.

Recent History of Election's Impacts on the US Stock Market

As traders, we are interested in the short term impacts on the stock market by major elections. Will tomorrow's French presidential election impact the US stock market again? Based on my study below, the Wall Street is telling us: No, as the VIX is at very low level, which is quite different from that on the day before the initial French election result about 3 weeks ago.

As part of the study on major election impacts on the US stock market, I looked at the prices of both SPX and VIX in the past year as shown in the chart below.

SPX & VIX's Reactions to Major Elections

• More than 50% of time when VIX reached 16.5 and above were due to pending elections
• British EU Exit (Brexit)
• US Presidential Election
• French Presidential Election (Initial)
• VIX created negative divergences when foreign elections were pending
• SPX price does not fall deeper but the fear on the stock market (VIX) increases to higher level
• The negative divergence suggests over-abundance of fear
• It's usually bullish for stock market

These are my observations only. What are your findings as a seasoned trader?  For the long history of how stock market reacts to US presidential elections, I found the following article very helpful: How the stock market performs on, and after, Election Day on MarketWatch.com.

Since traders need to prepare for major events before they occur, we are interested in FED announcements as well. I had studied the impacts of FED announcement on stock market before in my post: A Study of Market Moves, VIX and FED meetings. I plan to update and review the recent impacts of FED announcements in the future when I get a chance.

Big market impacts by the French election result today

Today, markets reacted to the results of the French election in which the pro-EU candidate won for the initial round. SPY & QQQ had the biggest surge (up 1.1% & 1.2% respectively) since they started to fall about 7 weeks ago. The VIX volatility index had a biggest drop (25.9%) in years.

Besides the stock market rally, the bond market (TLT) dropped as investors exited US bonds to take more stock market risks. The Gold market (GLD) also took a beating as investors reduced the level of concerns for world affair uncertainties.

The strong market impacts of the French election is shown in the market chart below. With the big rally of the stock market, the market outlook is definitely turning more bullish now. I had entered bullish positions on a few stocks (EPI, EEM, PVH) and plan to document them later when I get time.