Profiting From French Election Volatility

Attempting to predict the outcome of an election is a fool’s errand — we don’t bother with it.

But that doesn’t mean we can’t make money off the vote…

Over the last few weeks we’ve discussed the reasons for the rise of populism and how it’s impacted the false trend in European equities. We explained how these Soros-style false moves are dependent on narrative “tests” that either strengthen the trend or reverse it. In Europe’s case, its narrative test is arriving in the form of French elections.

This year’s elections are pivotal because the French are dangerously close to electing a populist, anti-euro candidate named Marine Le Pen. If she clenches a victory, there’s a good chance France will leave the EU, hammering the final nail into the coffin of the European experiment. The aftermath will quickly negate the short-term positives driving European equities.

The general consensus is that Le Pen will lose. But this is only one possibility. There’s also a good chance Le Pen actually wins. Like we said, no point in trying to predict the outcome directly. We’d rather put our money in something clear cut when it comes to these narrative “tests”. And that something is volatility.

The way we play volatility heading into macro events is based off how vol behaves around equity earnings. Take a look at Amazon’s option volatility below:

The red dotted lines denote earnings announcements, and the blue line is the implied volatility of the weekly options. (To learn more about implied volatility and options click here.)

The pattern is clear. As earnings approach, traders bid up implied volatility. This reflects the increased uncertainty that comes with a data release. The results serve as a narrative “test” for the stock. After earnings are announced, implied volatility plummets as pent up uncertainty is resolved. You can see this in the chart. The blue line crashes to normal levels after each earnings date.

Extrapolating this pattern into macro land means going long vol into uncertain events. And then being short vol over the event to benefit from the vol crush after the uncertainty is resolved.

We executed this exact strategy during the U.S. elections. It played out perfectly. VIX ran up before the event and sold off hard afterwards.

The VIX puts we traded post U.S. elections were one of our more profitable trades in 2016.

For the French elections we wanted to pull from the same playbook.  

The European stock market has its own volatility index called VSTOXX. It’s their version of the VIX. They also have futures on VSTOXX making it possible to bet directly on vol.

But in this case, VSTOXX futures weren’t the best option to play the French elections. They had already priced in the coming volatility.

VIX futures on the other hand were sitting in a quiet range near lows.

And on top of the election catalyst, U.S. markets had gone a while without the VIX term structure inverting (represented by a value over 1.00 in the chart). At the time it had been 147 straight days of peace and quiet since Trump’s win. And as we know, long periods of low volatility tend to precede a large spike.

There was clearly a trade here.

We ended up pulling the trigger and going long vol using UVXY on April 6th (our Hub members were alerted to the trade immediately).

Over the next week UVXY ripped as traders rushed for cheaper hedges into the French elections. Our UVXY position appreciated 20% in six days before we exited.

The original plan was to hold into the Friday before French elections. But Monday’s price action warranted an exit. The vol term structure (VIX/VXV) closed below 1.00. Historically speaking, this was a reliable signal that VIX would continue to mean revert lower.

Vol could still spike more before elections, but the risk/reward isn’t good enough to continue holding. At current levels the trade is more of a 50/50 proposition than 80/20 like when we first entered. We aren’t in the business of betting on fair coins. We need edge. It was time to take profits and move on.

But lucky for us the fun isn’t over. Things are getting more interesting as the election approaches. According to prediction markets Le Pen is expected to win the most votes of any candidate in the first round of elections on April 23rd. She’s represented by the light blue line below.

French elections are conducted over two rounds. The first includes all 5 presidential candidates. To secure the seat in the first round, a candidate needs over 50% of the votes. Otherwise the elections go to a second round between the top two candidates. So although Le Pen is expected to win the most votes on the 23rd, it likely won’t be enough to end the election. The race will go on to a second round on May 7th. Emmanuel Macron (the safe bet) is the favorite to win the second round because both Fillon and Melenchon voters are expected to support him over Le Pen. (Macron is pictured in light blue below.)  

We made good money betting on vol into the first round of elections. The plan now is to sit back and see how things shake out on the 23rd. From there we’ll look and see if any volatility trades look attractive for the second round. Our upcoming May edition of the Macro Intelligence Report (MIR) will have all the details. To learn more about the MIR and how you can profit alongside us, click here.  



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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.