Wednesday, March 19, 2008

Taiwan Election Trade

Take note that the Taiwan presidential election takes place this Saturday (Mar. 22). Taiwan's prediction market ( is placing an 89% chance that Ma Ying-jeou will win the election. This may serve as a huge catalyst for a rally in Taiwanese stocks in the next few weeks or months.

I've entered a 30% position in the EWT June 12.50 call option. Expect EWT to hit at least $16 if the election goes as expected. That means a gain of about 20% for the call option. Any further gains will be icing on the cake. Below is the calculations for determining position size. Kelly criterion says putting 34% of the portfolio into this trade will maximize return (and volatility).

Expected return: .11x(-100%) + .89x20% = 6.8% gain
Kelly criterion: 6.8% / 20% = 34% weighting

Since markets are closed this Friday, tomorrow will be the last chance to enter this trade.

1 comment:

Jing said...

Hi, Henry:

Thank you for your comment. Your posts look very interesting. How is this Taiwan trade going so far? I am wondering if the market already fully discounted the election results.