Market Volatility Expected to Surge Ahead of US Election
As the US election approaches, options traders are bracing for impact, reducing risk and preparing for increased market volatility. The contest between Kamala Harris and Donald Trump is too close to call, leading investors to hedge their bets across various asset classes.
Equity Options Signal Caution
Implied volatility in equity options has climbed, indicating that investors expect wider price swings in the coming days. The S&P 500 Index has gone 29 sessions without a significant drop, but traders are not taking any chances. Shorter-term options are being used to position closer to the election, with investors adding tail-risk hedges on higher rates.
Currency Markets Prepare for Turbulence
Currency traders are betting on wider swings, with volatility for the yuan, Mexican peso, and euro increasing due to uncertainty about trade and tariffs. One-week dollar-yuan swings have hit a record high, while volatility in the euro has risen to its highest level since March 2023.
Bond Market De-Risking
In the bond market, traders are de-leveraging positions in futures, skewed toward long liquidations amid rising expectations of a post-election boost to fiscal stimulus. Open interest in 10-year note futures has dropped sharply since the start of October as yields have climbed.
Crypto Traders Diverge on Election Outcome
Crypto traders are divided on the election result, with the options market shifting from aggressively bullish to a more hedge-focused approach. Implied volatility for short-term contracts has risen significantly, while calls with the same expiration remain stable.
Post-Election Outlook
Once the election is over, fundamental market flows are expected to build up support for a rally into the end of the year. Hedges will be taken off, mutual fund buying will kick in during November, companies will repurchase shares, and lower volatility will draw in systemic buying and rehedging by option dealers. This could lead to a sharp drop in volatility and a flatter skew, forcing more buyers into the market and pushing prices higher.
Binary Options Gain Popularity
Binary options, which allow investors to bet on the direction of two assets concurrently, have picked up in popularity ahead of the election. This is likely due to investors having firm views on how individual assets will behave in the four key permutations of the US election.
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