Election May Cause Rally in Taiwanese Stocks

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 Taiwan ETF (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 are 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, today will be the last chance to enter this trade.

Disclosure: Author holds June 2008 Call Options with a strike price of $12.50.

Comments

[huangthomas:]

It certainly looks like a good bet. As a matter of fact, Taiwan market has been doing reasonably well considering the turmoil in US and other major markets.

2008 Mar 20 09:42 AM