Everyone’s talking about the debt ceiling, but what’s the trade?
Here’s an idea.
On InTrade, the odds that the Congress passes the debt ceiling hike by the end of February is down to a mere 20%. That’s really low for something that the bond and stock markets are still taking for granted.
Thus there should be a simple trade involving going long the InTrade contract, and short the stock market, which would probably take a major leg down in the event we didn’t pass the debt ceiling. You could do it with puts for leverage.
You’d need to calibrate the trade, obviously, but assuming the debt ceiling is ultimately passed, you get 5x your money on the InTrade bet, while losing whatever you paid for in puts (which are cheap right now). If the Congress doesn’t pass the debt ceiling, you could likely make money on the latter.
The only way you can lose (we think) is if the Congress doesn’t pass the debt ceiling, but markets don’t drop that much. Another possibility is that the issue doesn’t come to a fore before the end of February, so you may want to wait until you see contract for March of April, which will likely be soon.
Good luck! Nothing in this post should be construed as advice! We have no position in any of this!
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