(Bloomberg) — Just before the hotly contested U.S. election is considered a toss-up, options traders in several markets appear to be reducing risk and bracing for more volatility.
Stock option volatility rose through most of October, even as market swings were subdued in anticipation of not only the upcoming election, but also earnings season and a Federal Reserve interest rate decision. The race between Kamala Harris and Donald Trump is too close to happen in the final days before the election.
Bond yields have risen since the Fed cut rates in September, prompting investors to pull back some futures positions and add tail risk hedges on higher rates. For the most part, currency traders are betting on wider swings, with volatility rising for the yuan, Mexican peso and euro due to uncertainty over trade and rates.
“The positioning is pretty clean” after some broad risk reductions in recent weeks during the election and Fed meeting, said Stuart Kaiser, a U.S. equity trading strategist at Citigroup Global Markets Inc. “That’s good for the risks/rewards after the elections, depending on the outcome of course. Bonds seem to be moving more than stocks.”
Here’s how options traders are positioning themselves across asset classes, from stocks to crypto:
As expected, much of the election coverage emerged at the last minute, as shorter-term options make it easier to position closer to an event. Implied volatility is well above realized levels, with investors bracing for broader swings even as the S&P 500 Index went 29 sessions without a decline of more than 1%.
“We continue to see interest in trades around the election, with an uptick in recent days,” said Daniel Kirsch, head of options at Piper Sandler & Co. “Customers who expect Donald Trump to win the election are increasing exposure to financials and crypto stocks are gaining those who bet on a Harris buy options on renewable energy stocks. There is also a resurgence in hedging, with traders piling put options on the S&P 500 and QQQ ETF.”
The S&P 500’s short-term implied volatility has surged from one-month levels as the election and Fed bump seeps into the calculation of the shorter-term measure. The Cboe VVIX Index – which measures the volatility of the VIX – has also increased.
“Currently, the options skew is steep and the VIX is much higher than the realized volatility,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. “These are signs that the market is well hedged at this time.”
While volatility has increased, it indicates a move of about 1.7% for the S&P 500 the day after the election – not an excessive swing. The implied move has fallen steadily from a peak of around 2% in early October to roughly in line with the long-term average over the past election, said Stefano Pascale, head of U.S. equity derivatives strategy at Barclays Plc.
Beyond the general indexes, some sectors, such as crypto and clean energy stocks, are seeing a rise in volatility well above their median. Crypto stocks are touting moves of almost 10%, Morgan Stanley’s trading desk said last week, and those for sustainable companies are around 6%. That plays out in positioning, where, for example, more than 20,000 November call spreads were bought in Sunrun Inc. last week.
Once past the election, fundamental market flows are building support for a rally into year-end as hedges are removed, mutual fund buying kicks off in November, companies buy back shares and lower volatility leads to systemic buying and rehedging as per option. dealers.
“Assuming a dovish post-election period, we think these hedges could relax and we could see a sharp decline in the VIX and a flatter skew,” Ren said. “If both happen, it could force more buyers into the market and push the market higher.”
FX
Short-term currency options, which are now pricing in risk around the election, have seen an implied volatility jump in anticipation of bigger swings after the US election. One-week dollar-yuan swings hit a record high late last week as traders hedged against the possibility of higher US tariffs that Trump has threatened and a global trade war that could particularly hurt China.
Volatility in the euro – also vulnerable to any trade tariffs that a Trump victory could bring – has risen the most since 2020 and reached the highest level since March 2023, while risk reversals for the euro against the dollar remains bearish. The peso’s one-week volatility has risen to the highest level in more than four years, and the premium over expected fluctuations further in time has increased to the highest level since Bloomberg started collecting data in 2007.
Rates
Positioning in the government bond market in recent weeks has focused on traders deleveraging futures positions, trending toward long liquidations amid growing expectations of a post-election fiscal stimulus boost, which will tighten government bond supply would increase. As a result, open interest, or the number of positions held by traders, has fallen sharply in 10-year bond futures since early October as yields have risen.
De-risking, with traders taking chips off the table, is also reflected in the cash market, where the latest research from JPMorgan Chase & Co. shows that clients are reducing both long and short positions as neutral values rise. In the government bond options market, tail risk hedges are associated with higher returns and a larger sell-off in the bond market compared to current levels. The 10-year put at 109.50 December is noticeably filled, representing a yield of about 4.5% and about 25 basis points higher than current levels.
“The election volatility premium is most pronounced in the bond market when it comes to long-term yields, which we believe reflects concerns about higher fiscal risks in an overall outcome,” said Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist. “The skew suggests a demand for hedges that use payer swaptions against a sell-off in long-term interest rates.”
Crypto
Crypto traders diverge on the election outcome, with the options market shifting from aggressively bullish to a more hedge-oriented approach. Implied volatility for short-term contracts such as the 14-day puts has increased significantly, while calls with the same expiration date remain stable, according to data collected by crypto liquidity provider B2C2.
While there is no clear directional bias with increased volatility ahead of the election, rising premiums for longer-dated calls and so-called Bitcoin futures on CME point to a bullish outlook post-election, with more rate cuts and potential positive changes in the crypto policy in sight. next year.
Cross assets
Binary options – where a payout is triggered if a few conditions are met, such as a currency and a stock reaching a predetermined level – are often a popular way to hedge possible outcomes around major events. According to Esmail Afsah, derivatives strategist at JPMorgan, such trades are on the rise during the elections.
“I suspect this is mainly because investors have strong views on how individual assets are likely to behave in the four major permeations of the US election,” Afsah said. “Using hybrid options and simultaneously betting on the direction of two assets makes it possible to significantly increase leverage and thus improve the odds, provided of course that the assets indeed behave as expected.”
–With help from David Pan, Christian Dass, Jessica Menton and Jan-Patrick Barnert.
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