New York: As the highly anticipated U.S. presidential election approaches, options traders are hedging their bets across various asset classes, preparing for potentially sharp swings. According to Bloomberg, traders are actively reducing risk and bracing for volatility ahead of the Tuesday election that sees Kamala Harris and Donald Trump locked in a close race.
Equity options volatility spiked through October, driven by the election, earnings season, and an upcoming Federal Reserve decision. Implied volatility for equities remains high, with short-term hedges around the election becoming increasingly popular. While the S&P 500 Index has managed to avoid significant swings recently, traders are positioning for potential shocks as votes are counted.
Stocks and Options:
Hedging in stocks intensified in the days leading up to the election, with investors preparing for post-election moves. “Interest in trades around the election has picked up,” said Daniel Kirsch of Piper Sandler & Co., noting that bets on a Trump victory focus on financial and crypto stocks, while those expecting a Harris win prefer renewable energy plays. Implied volatility on the S&P 500 remains above average, signaling market caution.
With the Cboe VVIX Index — a measure of volatility for the VIX — elevated, markets are preparing for roughly a 1.7% swing in the S&P 500 the day after the election, which is in line with historical election averages. Some sectors, particularly crypto and clean-energy stocks, are experiencing volatility at significantly higher levels than usual, reflecting the heightened sensitivity of these sectors to political outcomes.
Currency Markets:
In the currency markets, short-term options are pricing in volatility around the election. The dollar-yuan pairing saw a one-week volatility spike late last week, as traders hedge against potential changes in U.S.-China trade relations, especially under a Trump victory. Volatility for the euro and the Mexican peso also rose as uncertainty looms over possible trade adjustments and tariffs.
Notably, the one-week volatility for the peso is at its highest in over four years, reflecting fears that U.S. trade policies could see a shift post-election.
Bond Market and Interest Rates:
In the bond market, traders have been unwinding long positions in Treasury futures, with open interest dropping sharply since October amid rising yields. JPMorgan Chase’s latest survey indicated a pullback from both long and short positions as traders prepare for potential fiscal stimulus that could increase bond supply post-election.
Demand for Treasury options at higher yields has increased, with December 10-year puts targeting a yield of approximately 4.5%. This de-risking reflects broader fears of a selloff in the bond market, which could occur if the election result leads to an aggressive fiscal policy.
Crypto Markets:
In the crypto market, options traders have shifted from a predominantly bullish stance to a more cautious approach. Implied volatility for short-term puts on assets like Bitcoin has increased, though longer-term call premiums remain strong. This mixed outlook suggests that traders are balancing election-related uncertainty with a bullish sentiment for crypto markets in 2024, potentially driven by favorable regulatory changes and monetary policy.
With critical events like the U.S. election and Fed meeting on the horizon, traders across markets are on edge, hedging against wide-ranging scenarios. If the election concludes smoothly, analysts expect these hedges may unwind, potentially easing market volatility and sparking a year-end rally.
