A year ago, some believed Trump might win the election, thinking Kamala Harris was a weak candidate. While betting odds were tight, many felt Trump could lead a Republican sweep, particularly in the House, which seemed unlikely at that time. Many ‘Trump trades’ did not succeed. Jim Cramer’s pick, New Fortress Energy, had ups and downs with Trump’s improving odds but fell due to high debt, now down 86%. Cramer’s other choices included betting against Nike and Starbucks, which dropped by 2.81% and 8.94% respectively. In contrast, Albertsons rose by 5.65%, Amazon by 28.3%, Apple by 3.52%, and Johnson & Johnson by 8.42%. All these trades performed poorly compared to the S&P 500’s 15.9% gain.

The Defining Political Trade

Bill Ackman pointed out that investing in Fannie Mae and Freddie Mac was a successful Trump trade, as they might benefit from being taken out of conservatorship. Fannie Mae saw a jump from $2.65 to $14.40, representing a 12x return. Ackman’s investment paid off as the U.S. Commerce Secretary hinted at a possible initial public offering (IPO) for both companies, potentially the largest ever. Reflecting on the past, the 12x gain on Fannie Mae since last September was the standout political trade, but that chance has passed. Now that the stock is at $14.40, the focus has shifted from speculative gains to event-driven changes. We’ve noticed implied volatility in near-term options rise above 150%, similar to the meme-stock phenomenon of early 2020. The trade is no longer about the simple idea of a Trump administration freeing the GSEs; that is now what the market expects. In the coming weeks, the main concerns will be execution risk and timing, especially after Commerce Secretary Lutnick’s remarks about a fast-tracked IPO. Any delays or issues could lead to significant stock corrections, making unprotected long positions riskier than they have been in the past year.

Market Strategies

With very high implied volatility, buying options outright has become expensive. Instead, traders are turning to strategies that generate income, like selling covered calls on existing stock holdings or using credit spreads. Recent analysis shows that a 30-day, 20% out-of-the-money call option is bringing in over 8% of the underlying stock price, indicating the market’s prediction of big price movements. The main thing to watch for is a clear timeline or structure for the IPO mentioned by Lutnick. Looking back at the PayPal spinoff from eBay in 2015, specific details about dates and terms led to significant price shifts in the final months. Until there’s an official filing, we can expect the stock to react strongly to rumors, making defined-risk option strategies a safer choice. Create your live VT Markets account and start trading now.

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