One theory of trading says that the market will move in such as way as to hurt as many participants as possible.  This is often referred to as the theory of maximum pain. Like most trading theories it works ... except when it doesn't.  But it can be fun to try to figure out a market move that will hurt a lot of traders.

From my perusal of trading sites, it seems that almost all participants are making two dangerous assumptions:  (1) Further QE is a given and it will keep the market levitating; and, (2) The market will not sell off prior to the election.  Even many traders with a long-term bearish outlook are assuming this and are currently long.

It would be fun to make a 'maximum pain' trade and bet on a sharp move downward that occurs prior to the elections.  Short-dated puts would be ideal for this, especially on gold.  A large downward move in risk assets would likely take everything with it, but in the short term gold seems most vulnerable.  It's due for a large correction and a big crack just before the elections would screw a lot of people.

Odds are, the two assumptions above are in fact correct, but they're still dangerous if one is not prepared for them to be wrong.  I'm tempted to put on a small 'maximum pain' trade in my model portfolio, but short-term gambling is not the purpose of that particular exercise.  If the market (especially gold) does tank prior to the election, the wailing and gnashing of teeth coming from various trading sites will be amusing as hell.

Posted by: Hermit Dave at 07:15 PM | No Comments | Add Comment
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