I have spent a lifetime analyzing risk for major hedge funds, and what I can always rely on is that firms staffed by the smartest people in the industry never fail to underestimate the threats to their business.

Often, they are totally ignorant of the biggest risks of all.

My friend, mathematician Nassim Taleb, explained all of this in his widely read tome, The Black Swan, a few years ago, .

He mentioned the example of a major casino that hired him to analyze their business risk. Management was expecting to find ways to frustrate card counters at black jack, or cash grab-and-run thieves at the roulette wheels.

After doing some simple research, Nassim informed the company that it completely missed the four biggest risks to gambling in Nevada.

For a start, their state gambling license was about to expire, resulting in a potential immediate shutdown and a long and expensive reapplication process.

Next, an irate gambler who lost money parked a truck bomb in front of the casino. It failed to blow up because, not only was the man a poor gambler, he was incompetent at building timers and fuses.

In fact, the casino?s main concerns didn?t even rank in the top ten of business risks and were minor affairs at worst.

As I learned in karate school in Tokyo half century ago, it?s the punch you don?t see coming that knocks you out.

We have another one of those potential punches coming up on November 8th.

Donald Trump is so pitifully behind in the polls that his chances of wining are less that 100:1. You can get 90:10 odds at the betting pools in London. He now has less than five weeks to pull his campaign out of the fire.

But what if he does win?

You can expect the Dow Average to open down 1,000 points at the opening, possibly as much as 2,000 points. I don?t see firm support until we hit 17,000, down 9.1%, or off 1,700 points from the recent high.

Below that, we are looking at the February, 2016 low of 15,500, or a 3,200 point, 17.1% plunge.

When I mention this to subscribers, they recoil in horror. It must be impossible!

I respond, ?No Way Jose!?

I was standing on the equity trading floor at Morgan Stanley on October 19, 1987 when the Dow Average collapsed an incredible 22.1% in one day (from 2,500 to 1,750).

And there really wasn?t anything special happening that day, just the execution of the hedges for an arcane strategy called ?portfolio insurance? that all hit at the same time.

So it behooves us to take out some insurance against the unlikely 100:1 event actually occurring.

I know many hedge funds that are already strapping on this position right now. It is a truly "asymmetric trade" which hedge funds happen to love, one with a very low risk, but a very high possible return.

In fact, there are funds now that are solely devoted to this kind of trade.

This is how you do it.

You buy the cheapest put options you can find deep out-of-the-money for the front month on stock market indexes.

For example, at the October 5th close you could buy the S&P 500 (SPY) November 195 puts for 50 cents. They expire on November 18, 2016.

If Trump loses, you write off your entire investment.

However, if he wins, it?s another story completely.

Let?s say the (SPY) opens on November 9th down 10 points. The November 195 puts should rocket by 265%, from 50 cents to $1.32.

And they should rise much more than that, as there will also be a simultaneous explosion in options implied volatility and the Volatility Index (VIX).

If the (SPY) opens down 15 points, not inconceivable, your November 195 puts should soar by 420% to $2.10 or more.

You can play around with the numbers to see what works for you. You can buy (SPY) put options for as little as five cents.

It gets better.

Dozens of hedge funds are already putting this trade on to protect existing long-term core positions.

So you should get a generalized rise in deep out-of-the money put options going into the election even if the stock market continues to trade in a narrow range.

You could make a decent profit on that rise alone, and then take the profit before Election Day.

And what if the election is still undecided by the November 9 opening? Put options will be extremely well bid, even if Clinton eventually wins in a recount (remember 2000), in a tied Supreme Court, or wherever?

A friend of mine did exactly this kind of trade in the run up to the 1987 crash. He had started working at Morgan Stanley only two weeks before. He saw the crash coming on his first day at work.

He then borrowed $10,000 from his dad and bought very deep out of the money (SPY) put options. Everyone thought he was nuts.

On crash day his $10,000 turned into $15 million! He then said ?It?s been great guys,? and retired to start his own hedge fund.

Ask any old timer at Morgan Stanley, and they know the story. Some might even remember his name.

Don?t expect to make $15 million on this trade. However, you should get the kind of asymmetric return you can brag about to your friends for the rest of your life.

That is, unless Hillary Clinton wins first.

Looks Like a Good Bet to Me

They DO Bite

Come join me for lunch at the Mad Hedge Fund Trader?s Global Strategy Update, which I will be conducting in Incline Village, NV on Friday, October 7, 2016. An excellent meal will be followed by a wide-ranging discussion and an extended question and answer period.

I?ll be giving you my up to date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I?ll be throwing a few surprises out there too. Tickets are available for $218.

I?ll be arriving at 11:30 and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at the premier restaurant in Incline Village, Nevada on the sparkling shores of Lake Tahoe. Those who live there already know what it is. The precise location will be emailed with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research. To purchase tickets for the luncheon, please click here.

It?s a good thing I went to an Oktoberfest last week.

That gave me a chance to get my German up to snuff just in time for Deutsche Bank to run into financial troubles.

Since 2008, the knee jerk reaction to bad news about any major bank is that the Lehman Brothers nightmare is about to repeat itself.

It only took a few calls to Frankfurt and some reminiscing about the good old days in West Berlin for me to figure out that Deutsche Bank is no Lehman. They have tons of liquid cash and a rock solid balance sheet.

A systemic threat it is not.

Do you really think the Germans are going to bail out Greece, but let its largest bank go? I don?t think so.

It is only fear of a 50% dilution from a new capital raise that is driving investors out of the stock.

Not helping is the $14 billion in fines the mega bank still owes the US Justice Department related to abuses committed in the run up to the 2008 crash.

Does that sound remarkably similar to the $14 billion Apple (AAPL) owes the Irish government? I?m sure it?s just a coincidence. And I am equally shocked they allow gambling in the casino.

However, automatic fears like this will probably continue for another generation, much like they did after the great 1929 crash, leaving investors on the sidelines.

That all adds up to a giant SELL for all asset classes. There really is no place to hide.

So far, every puke-out has been met by a wall of buying from underweight, underperforming, performance-chasing investors targeting 2,013 in the S&P 500 (SPX).

If this behavior continues, we could be in for what I call ?The dreaded flat line of death?.

This occurs when markets trade in incredibly tight ranges creating opportunities for virtually no one. That is exactly what we saw during the five-month period during the spring and summer of this year.

This could last all the way until the presidential election on November 8th.

So I have been hiding out with a nice little short position in the bond market (TLT), which delivered a convenient two point dump on the last trading day of the month, just pushing my performance mercifully into the green.

Hey, in these miserable trading conditions, I?ll take a push any time.

Isn?t that what?s supposed to happen when the Fed promises to raise interest rates in December?

You could have made a lot of money last week trading the Volatility Index (VIX) which made two round trips between $12-$15, a 25% range.

When will the next market panic ensue?

When a confident, assured, even tempered, and well prepared Donald Trump, brimming with facts, wins the Sunday, October 9th presidential debate at Washington University in St. Louis, Missouri.

CNN?s Anderson Cooper will be the moderator, and the questions will be randomly posed by individual citizens in a town hall format and via social media.

It will be a real ?think on your feet? challenge for both candidates.

I can?t wait.

Finally, since I am basically a positive person, I like to end on a high note.

San Jose, CA based Nutanix (NTNX) launched the best performing IPO of the year on Friday, up 131% on the first day.

The performance had the airwaves in Silicon Valley burning up.

Yes, I know these deals are engineered to create a structural short squeeze at the beginning.

But is this the deal that gets unicorn giants like Uber and Airbnb off the bench? Are another 100 unicorns behind them ready to go public? Are extravagant IPO parties making a return after a 16-year hiatus?

Most importantly, IS THE DOTCOM BUBBLE BACK?

The possibilities boggle the mind.

On Monday, October 3 at 8:30 AM, we get August Gallup Consumer Spending which should show that Americans are using their credit cards as much as ever.

On Tuesday, October 4 at 8:55 AM EST, we learn the Redbook for the week, tracking the behavior of consumers at chain stores, discounters, and department stores.

On Wednesday, October 5 at 10:00 AM EST, we get September Factory Orders and the ISM non-Manufacturing Index.

On Thursday, October 6 at 8:30 AM EST, we get the Weekly Jobless Claims which should confirm that employment remains at four decade highs.

Friday, October 7 delivers us the September Nonfarm Payroll report at 8:30 AM EST, the big release of the week. Expect a big bounce back from the disappointing 151,000 print last month, as well as substantial upside revisions.

We wind up with the Baker Hughes Rig Count on Friday at 1:00 PM EST. Worryingly, the trend has been up for the past 13 out of the past 14 weeks. Given OPEC?s surprise, and not believed, production cap last week, this report should garner more interest than usual.

All in all, I expect us to continue trading in narrow ranges, with profits accruing only to the quick and the nimble.

?If my analysis about Deutsche Bank proves correct,? all of the volatility could be confined to Friday morning.

Good luck and good trading. Keep your hard hat on.

John Thomas
The Mad Hedge Fund Trader

All is Good With Deutsche Bank