“No Room for Politics in Your P&L”: Why Trading Your Beliefs Bleeds Your Returns
Markets don’t care about your party, your tribe, or your timeline. Price is a ruthless aggregator of all publicly available information and incentives. When you let politics steer your trades, you’re not “adding insight”—you’re adding bias. This is especially true in volatility trading, where political narratives can lure you into misjudged bets on regime shifts, spikes, or suppressions that never materialize. Below is a research-backed case for stripping politics out of your process, plus concrete rules to keep you honest, with a focus on how avoiding political bias helps sidestep common volatility trading traps like premature long-vol positions or overconfident short-vol strategies.
The Evidence: Political Views Skew Expectations—Not Returns, Especially in Volatility
Partisanship warps economic expectations. After elections, households of the winning party become far more optimistic about growth and markets, while the losing side turns pessimistic—even though their actual spending barely changes. That’s a textbook belief distortion without real informational edge. In volatility trading, this manifests as partisan traders overestimating post-election vol spikes (e.g., fearing policy chaos) or underestimating calm, leading to asymmetric losses on VIX calls or straddles.
Fund managers with partisan tilts don’t outperform. When portfolio managers overweight companies led by executives who share their politics, performance does not improve; instead, idiosyncratic risk rises.
Polarized positioning is rising—along with risk. Studies show “myside” bias is dangerous. In vol contexts, this bias can drive crowded trades into volatility products during politically charged periods, amplifying drawdowns when the expected outcome fizzles.
Takeaway: Politics reliably shifts sentiment, not cash flows. Trading on it adds noise to your process, and in volatility trading, it encourages bets on fleeting noise rather than data.
The Out-of-Power Pessimism Trap: Inflating Volatility Expectations When Your Party Loses
When your preferred party is out of power, it’s easy to fall into the trap of assuming the ruling administration will “mess things up,” leading to economic instability, policy blunders, and heightened market volatility. This partisan pessimism often manifests as doomsday narratives: fears of reckless spending, regulatory overreach, or geopolitical missteps that will spike the VIX and disrupt markets. However, historical data reveals that market volatility is typically similar regardless of which party holds the presidency, debunking the notion that one side inherently creates more chaos.
In volatility trading, this out-of-power bias can lead to costly traps. Traders might overbuy long-vol positions like VIX calls or UVXY shares, anticipating a “due” spike from the opposing party’s policies, only to suffer theta decay when markets remain stable. Conversely, they might avoid short-vol strategies out of unfounded fear, missing steady premium collection during calm periods that persist across administrations. By recognizing this trap, traders can avoid emotional overhedging and stick to data-driven signals.
Why Politics Makes You a Worse Trader (Mechanically)—And Traps in Volatility Trading
Confirmation bias: You overweight data that fits your worldview and ignore disconfirming signals. (You’ll find a chart to match any narrative.) In vol trading, this means cherry-picking indicators to justify a political vol bet, like ignoring low realized vol amid “scary” headlines.
Narrative over cash flows: Politics focuses you on stories; prices discount future cash flows and discount rates. Volatility trading demands focus on variance swaps or term structures, not partisan tales that rarely drive long-term vol paths.
Time-horizon mismatch: Political cycles are episodic; most equity value sits far in the future. Near-term political noise has a small net present value impact relative to secular drivers. Vol traps arise from overreacting to short-term political events, like buying protection for “imminent crises” that extend your theta bleed.
Crowding & reflexivity: Political narratives are crowded trades with poor entry points; when the crowd flips, you become the exit liquidity. In volatility, this crowds into VIX products during hyped events, leading to contango losses or backwardation squeezes when politics prove irrelevant.
Avoiding trading your politics helps dodge these traps by keeping decisions data-driven: You’ll wait for vol clustering signals rather than preempting spikes from biased fears, reducing premature entries and improving timing in mean-reverting strategies.
Conclusion
Ultimately, injecting politics into your trading decisions—whether through out-of-power pessimism or partisan narratives—serves only to amplify risks and dilute returns, particularly in the nuanced arena of volatility trading. Markets operate on fundamentals, data, and collective incentives, not ideological wishful thinking. By committing to a politics-free approach, you empower yourself to navigate volatility with clarity and conviction, turning what could be emotional pitfalls into opportunities for consistent alpha. Remember: the P&L doesn’t vote; it simply reflects reality—trade accordingly.