By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Options players are piling into riskier bets in the U.S. stock market, supporting a rally that has emerged on waning election concerns and expectations of a Republican power grab in Washington next year.
The bullish developments cover a wide range of assets, from electric car maker Tesla to small-cap stocks and regional banks. Together, they have contributed to the S&P 500’s gain of 3% since the Nov. 5 vote.
“We have been freed from this major risk,” said Garrett DeSimone, head of quantitative research at OptionMetrics. “It’s just across the board… you have everything, except bonds, going up.”
Options traders took a defensive stance in the run-up to the election to hedge their portfolios against potential election-related volatility, including concerns about an outcome that could be too close to call immediately or could be contentious.
Many are now shifting to a bullish stance, wary of underperforming a market that has rebounded following a Donald Trump victory and Republican control of both houses of Congress, which was expected after the election and predicted by Edison on Wednesday Research. The outcome is expected to give Republicans a freer hand in pursuing their economic agenda, which includes tax cuts and looser regulations.
Investors “are panicking to chase stocks to record highs,” Charlie McElligott, managing director of cross-asset strategy at Nomura, said in a note earlier this week.
The volume of daily call options – which profit when stocks rise – outnumbers put options by a ratio of 1.5 to 1, compared with 1.3 to 1 for the rest of the year, Trade data shows Alert.
According to Deutsche Bank, net call volume for individual stock options rose sharply in most industry groups after the elections.
More broadly, the volatility landscape has changed dramatically, with the Cboe Volatility Index – a measure of demand for portfolio protection – falling to a nearly four-month low of 13.67.
“What the volatility market was worried about didn’t materialize, so all that excess worry came out of the market,” said Michael Thompson, co-portfolio manager at boutique investment firm Little Harbor Advisors.
McElligott cited increased demand for call options in a range of names, including options on iShares Russell 2000 ETF ARK Innovation ETF, SPDR S&P Regional Banking ETF and the VanEck Semiconductor ETF.
The shift from worry to upside speculation was visible in Tesla options, with investors flocking to call options as shares soared post-election on bets that CEO Elon Musk’s close ties to Trump could benefit the EV maker.
