5 Election Day Option Trades

The midterm elections are less than a week away, which means you need to prepare your portfolio[1]. For the most part, the positive market action seems to have priced in the Republicans taking control of the House, as data show that the GOP is better for stocks[2].

Wherever your political allegiances lie, we know you like making money, so we’ve put together a list of option trades that should benefit as the political drama plays out. Keep reading to get our vote for the best options to own heading into Nov. 2.

Recommended by: Sam Collins, Editor, Daily Trader’s Alert[4]

The overall market may have priced in a victory by Republicans for control of the House of Representatives, but some financial stocks may not have yet accounted for that outcome, including Citigroup Inc. (NYSE: C[5]).

Technically, the stock has support at its 50- and 200-day moving averages[6] at around $3.75. But a breakout at $4.30 could quickly result in a run to $5, which is S&P’s 12-month target. S&P currently rates the stock a "four-star buy." 

Buy C March 4 Calls.

Recommended by: Chris Johnson and Jon Lewis, Editors, The Winning Edge[7]

Things are looking for up for the railroads, a trend that should continue no matter who has control of Congress. Earlier this month, CSX Corporation (NYSE: CSX[8]) reported a 45% increase in earnings from a year ago, thanks to increases in cargo shipments and more efficient operations.

The stock is up more than 25% over the past two months and is sitting at a two-year high. Next up is the all-time high around $70, reached in May 2008. That leaves plenty of room for the rally to continue, especially as the economy creeps forward to recovery. Another factor to consider is that CSX has a high short interest ratio (about eight days to cover), which represents a reservoir of buying power should the shorts be forced to cover as the momentum continues. 

Give the rally plenty of time by buying the CSX Jan 2011 60 Calls. If CSX reaches the $70 level, you should more than double your money with these options.

Recommended by: Michael Shulman, Editor, Short-Side Trader[9]

The Republican Party has vowed to overturn health care legislation passed this year, but the Democrats will control the Senate and the veto pen is firmly in the hand of President Obama. Big Parma companies promised to reduce or cap prices, but they have done nothing of the sort, and the stocks are likely to become casualties of the political fever over this hot button issue.

For the past few weeks, the Pharmaceutical HOLDRs (NYSE: PPH[10]) has negatively diverged from the S&P 500 in very choppy trading. It is sitting right on its 10-day moving average. When the ETF clearly breaks through it and heads toward its 50-day, traders should buy PPH Jan 2012 puts.

Recommended by: Chris Johnson and Jon Lewis, Editors, The Winning Edge[7]

Alternative energy has been a beneficiary of the current Congress’ legislative mission, with wind and solar companies gaining favor. While that won’t come to a crashing end, we have to consider that oil and oil service companies that have struggled a bit through this paradigm shift may slip back into a better light based on any significant Republican gains in Congress.

Investors have "voted" bearishly on these companies’ near-term futures, as options activity and short interest have both shown a rise in pessimism toward the oil services sector. We’re more likely to see these bears turn to bulls if Congress changes hands or at least becomes more balanced, as investors will expect any type of change to be more hospitable to the oil sector.

Halliburton Company (NYSE: HAL[11]) is one of the more recognized names in the sector, and is already showing signs that an Election Day change will spark a bullish run. The shares are up around 25% over the past two months to sit near a two-year high. Buy the HAL Dec 37 Calls to take advantage of this momentum after the elections.

Recommended by: Sam Collins, Editor, Daily Trader’s Alert[4]

The SPDR Gold Shares (NYSE: GLD[12]), which seeks to replicate the price gold bullion and its performance, has accurately traced gold’s meteoric rise this year. And a Republican victory and another round of quantitative easing from the Fed will be more good news for gold.  

Technically, GLD has major support at its 50-day moving average at $126, but it may not drop that far, so the recent pullback from $135 to under $130 may be the best buying opportunity that we will get in the near future. 

Buy the GLD March 130 Calls.