Strangle the Bailout Vote

Bloomberg just announced the Senate will vote tonight on the Bailout. If you are interested in an article that expresses why I personally think the proposal is a bad idea -- read this. Regardless, with the imminent volatility ahead, today would be a good day to set up a Strangle (no pun intended!) Here is how the setup will work.

I'm going to choose CME because its price will be directly effected by tonight's vote, and it also made a large, $70 move on monday during the first vote -- let's expect history to repeat itself.

The strangle is simple -- let's not overcomplicate it. Basically you are placing 2 simultaneous trades, one for either direction of market movement. A slightly out of the money Call and Put are purchased with the same expiration date and underlying asset. CME is currently trading at $390 as I write this, so I will be purchasing the $400 Call and the $380 Put. When I wake up tomorrow and find out which way the market is headed, I'll close the "wrong" position for whatever is left of it, and go to the bank on the profitable one.

DANGER: The significant problem here is that the Market Makers know that huge volatility is ahead and they are inflating the options right now. You can see this inflation in several areas: the size of the spread is $2 or more right now, Implied Volatility is well over 70, and the Delta for these OTM options is below 50. The question is, will the move be significant enough to still be profitable -- this is why they make virtual accounts, to test our skills!