The stock market has become an algorithmic dance party.
When President Donald Trump tweets, the news algorithms that dealers and quantitative hedge funds use to protect trading books from surprise information create erratic trading patterns. Dealers adjust their liquidity and spreads to discourage or encourage investors from trading with them, while quant funds boogie back and forth as the market swings around.
If the whole thing could be set to music and synchronized with overhead flashing lights, the markets would be like an acid-house dance party. In the absence of such innovation, investors can trade Trump’s tweets in the options market.
Unlike President Theodore Roosevelt, who favored talking softly and carrying a big stick, Trump tweets loudly and carries a big stick that he willingly swings at opponents. It’s probably too strong to say Trump, like President Richard Nixon, has an enemies list, but the president clearly has companies and people he does not favor. His Justice Department and Federal Trade Commission are emerging as effective tools to bring pressure on companies he has criticized, including Google parent Alphabet (ticker: GOOG) and Amazon.com (AMZN).
Trump seems to have realized that tariffs are a presidential power that he can wield against recalcitrant nations without really dealing with Congress. As Trump prepares to announce the start of his re-election campaign at a June 18 rally in Orlando, Fla., he has embraced tariffs to defend U.S. interests by pushing back on China President Xi Jinping, escalating the trade war that investors broadly expected to be over by now. The president also recently threatened via Twitter to levy tariffs against Mexico if our neighbor does not control immigration flows along America’s southern border.
Trump is unlikely to let up on his critics as he prepares for reelection, and thus the targets of his wrath are likely to become even more so. Aggressive investors who agree can consider buying “put spreads” on Amazon and Google and a put option on Twitter (TWTR). The spreads are designed to generate returns exceeding 100% if the stocks remain under pressure and tumble lower. The Twitter put is simply a relatively inexpensive way to short the stock with limited risk.
The Justice Department is reviewing Google for anticompetitive issues, while the FTC is reviewing Amazon. The popular stocks could languish under the regulatory overhangs. Twitter is thus far spared, but the social-media company could get nailed, too.
When Google was recently at $1,039, investors could buy the August $1035 put and sell the $995 put for $15. The put spread positions investors to earn a maximum profit of 166% if the stock is at $995 or lower at expiration. Should the stock rally, or not dip below the put strike, the spread fails.
When Amazon was at $1,735, investors could buy the August $1,720 put and sell the August $1,620 put for $36. The put spread positions investors to earn a maximum profit of 177% if the stock is at $1,620 or lower at expiration.
When Twitter was at a recent $36.23, investors could buy the January $33 put for $3.45. If the stock is at $25 at expiration, the put is worth $8. Should the stock rally, or not dip below the put strike, the money spent on the put is lost.
AT&T (T), which owns CNN, also recently attracted Trump’s ire. “I believe that if people stopped using or subscribing to @ATT, they would be forced to make big changes at @CNN, which is dying in the ratings anyway,” Trump tweeted. “It is so unfair with such bad, Fake News! Why wouldn’t they act. When the World watches @CNN, it gets a false picture of USA. Sad!”
For now, AT&T stays off the bearish trading log. AT&T’s 6.5% dividend yield, which offers shelter from broad market weakness, should keep the stock safe.
But Google, Amazon, and Twitter offer no such safety. They are big targets for a tough president who concedes nothing at the deal table—or anywhere else.