Options traders across markets seem to be lowering risk and preparing for increased volatility just before a fiercely contested US election that is regarded as a toss-up. Even though market fluctuations were mild, equity options volatility increased during the majority of October in anticipation of the forthcoming election, earnings season, and a Federal Reserve interest-rate decision. In the last days before the vote, Kamala Harris and Donald Trump’s contest is too close to call.
Since the Fed’s rate decrease in September, bond yields have been increasing, which has caused investors to increase tail-risk hedges on higher rates and withdraw from certain futures contracts. With the volatility of the yuan, Mexican peso, and euro rising due to trade and tariff concerns, currency traders are often placing bets on larger swings.
Stuart Kaiser, a US equities trading strategist at Citigroup Global Markets Inc., stated that following some broad de-risking in the weeks leading up to the election and Fed meeting, “positioning is pretty clean.” Depending on the outcome of the election, that is advantageous for risk/reward. It appears that bonds are moving more than equities.
Here is a look at how options traders are positioned themselves in a variety of asset classes, including cryptocurrency and stocks:
Stocks
Since shorter-term options make it simpler to position closer to an event, it is not surprising that a large portion of the election hedging has appeared in the last minute. Despite the S&P 500 Index going 29 sessions without a decline of more than 1%, investors are prepared for larger swings as implied volatility continues to run well above realized levels.
Daniel Kirsch, head of options at Piper Sandler & Co., stated, “We continue to see interest in trades around the election with a pick up in recent days.” “Clients betting on a Harris victory purchase options on renewable-energy stocks, while those who anticipate Donald Trump winning the election increase their exposure to financial and cryptocurrency stocks.” Additionally, traders are investing heavily in put options on the S&P 500 and QQQ ETF, indicating a rise in hedging.
Implied volatility for the shorter-term S&P 500 has been high compared to one-month levels since the election and Fed hike have affected the shorter-term measure’s computation. There is also an increase in the Cboe VVIX Index, which gauges the VIX’s volatility.
Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, stated that the VIX is far higher than the actual volatility at the moment and that the options skew is steep. “These indicate that the market currently has adequate hedges.”
The S&P 500 is expected to move 1.7% the day following the election, which is hardly an extreme movement, despite the high volatility. According to Stefano Pascale, head of US equity-derivatives strategy at Barclays Plc, the implied move has gradually decreased from a peak of around 2% in early October to be about in line with the long-term norm for previous elections.
Certain industries, including cryptocurrency and renewable energy stocks, are experiencing a spike in volatility that is far higher than their medians, in contrast to the overall indices. According to Morgan Stanley’s trading desk last week, cryptocurrency equities are pricing swings of about 10% and those for renewable energy companies at about 6%. This is evident in positioning, as last week saw the purchase of almost 20,000 November call spreads in Sunrun Inc.
Fundamental market flows after the election are creating support for a rally toward the end of the year. As hedges are removed, mutual fund purchases begin in November, firms buy back shares, and option dealers engage in systemic buying and rehedging due to decreased volatility.
“We think these hedges may unwind and we could see a sharp drop of VIX and flatter skew, assuming a smooth post-election period,” Ren stated. “If both occur, it may compel additional buyers to enter the market and raise prices.”
FX
The implied volatility of short-term currency options that are now pricing in election-related risk has increased in expectation of further significant movements following the US vote. As traders hedged against the prospect of a global trade war that might particularly harm China and greater US tariffs that Trump has warned, one-week dollar-yuan swings reached a record high late last week.
While risk reversals are still pessimistic about the euro vs the dollar, volatility in the currency, which is also susceptible to any trade penalties that a Trump victory may entail, has increased the most since 2020 and is already at its highest level since March 2023. The peso’s premium over anticipated swings further out in time extended to the largest level since Bloomberg started gathering data in 2007, and its one-week volatility surged to its greatest level in over four years.
Prices
The supply of Treasuries has increased over the past several weeks as traders have shifted their futures positions away from leverage and toward long liquidations in response to growing prospects of a post-election boost to fiscal stimulus. Since the beginning of October, the outcome has been a substantial decline in open interest, or the quantity of positions held by traders, in 10-year note futures as rates have increased.
Bitcoin
In response to the election outcome, cryptocurrency traders are dividing, with the options market shifting from an aggressively optimistic stance to one that is more hedge-focused. According to statistics produced by cryptocurrency liquidity provider B2C2, the implied volatility for short-term contracts, such 14-day puts, has increased dramatically while calls with the same expiration have remained consistent.
The rising premium for calls across longer tenors and termed Bitcoin futures on CME indicate a bullish outlook beyond the election, with more rate cuts and possible positive changes in crypto policies in sight next year, even though there is no obvious directional bias with increased volatility leading up to the election.
