US Election: How to Trade DJT and Tesla？

Moomoo News MY joined discussion · Nov 5 18:52

The 60th US Presidential Election is officially underway, with voting commencing in 2024. On 5th November, the quaint town of Dixville Notch in New Hampshire revealed its election tally from its six registered voters, with Harris and Trump in a dead heat, each garnering three votes.

US Election: How to Trade DJT and Tesla？

By noon on the 6th November (EST), the election outcome is expected to be all but certain, with Harris and Trump poised for the final face-off. Analysts suggest that several swing states could hold the key to victory, and the winner is likely to have a significant impact on US trade policy. In particular, if Trump wins, the global trade landscape could see a seismic shift. Market watchers expect that Trump's plan to cut corporate taxes could boost profits for companies, which might lead to a rise in the US stock market if he's elected. Conversely, Harris's potential policy of increasing taxes is viewed as bearish for the stock market.

Investor's Guide to Navigating the Stock Market as Election Day Nears

For the financial markets, the most pressing risk is the so-called "Trump Trade," with $Trump Media & Technology (DJT.US)$ and $Tesla (TSLA.US)$ being the most vulnerable. These assets have seen substantial gains on speculation that Trump will secure the election. However, if Trump fails to win, they could incur substantial losses.

Let's talk about $Tesla (TSLA.US)$ first. The recent Robotaxi launch press conference is still a hot topic, with the stock plummeting over 10% that day. On the surface, it appeared that the conference did not meet expectations, but there might be more profound reasons at play. The Democratic Party has introduced regulations that limit the number of such autonomous vehicles on the road to just a few thousand per year. Autonomous driving requires a substantial fleet to discuss commercialization, and Musk is keen for Trump to alter this regulation. Musk has placed all his chips on Trump in this election. If this political bet pays off, it could yield an incredibly lucrative return, and Trump would likely offer numerous policy incentives afterward. However, if Trump loses, Musk and Tesla could face a challenging four years.

This implies that regardless of the election's outcome, Tesla's stock price may experience significant volatility. Observing Tesla's option implied volatility (IV) is around 80%. In contrast, Nvidia, another US stock market giant, has an option IV of only around 60%. Compared to DJT, the top player in the Trump trade, its option IV has soared to an astonishing 600%. Does this suggest that Tesla's option volatility is currently greatly underestimated? Following this line of reasoning, we can devise our options trading strategy for Tesla.

A long volatility, buy a strangle strategy, involves purchasing call and put options with different strike prices but the same expiration date. For instance, I opt to buy Tesla options expiring on 8th November, a 260 call and a 230 put, costing a total of approximately $539 in option premiums. As long as Tesla's stock price either drops below $224.60 or rises above $265.40 by the election's end until November 8, We can potentially make a profit.

This means that if Tesla's stock price fluctuates by more than about 10%, we will benefit from it. So, how much will the election result affect Tesla's stock price? Looking back at Tesla's recent sharp stock price fluctuations, the stock price fell by nearly 10% after the release of Robotaxi, and after the release of the 24Q3 results, Tesla rose by 21%.

As for $Trump Media & Technology (DJT.US)$ , the current stock price stands at $34, which implies a market capitalization of $6.8 billion. However, it's noteworthy that the company's revenue for 2023 was $4.13 million. Such a substantial valuation significantly exceeds the company's actual "intrinsic value." The current high valuation is largely a result of the financial and emotional bets placed on the possibility of Trump's election. Even if Trump were to be elected, DJT might experience a short-term surge to an exorbitant price, but according to the theory of mean reversion, the stock price will eventually return to a "reasonable" range. Moreover, we've observed that the implied volatility of DJT options expiring on 8th November has reached a staggering 600%. This indicates that DJT's option prices are currently expensive.

Prudent investors might consider selling an out-of-the-money call option to earn the premium, for instance, selling a call option that expires on 17th January, 2025, with a strike price set at $115. If DJT's stock price remains below $115 by the expiration date, we can keep the entire premium received from the option sale. While this strategy has the potential to generate income, it's important to note that it also comes with the possibility of significant losses. The downside risk associated with selling a naked call option is substantial, as the potential for loss is theoretically unlimited.