US Election Hedging Likely to Be Last-Second, Options Pros Say
(Bloomberg) -- Volatility in US equity options remains relatively high by some measures, and while there are handful of reasons for that, the upcoming presidential election isn’t one of them, market flows indicate.
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The Cboe Volatility Index — or VIX — tends to increase into October during election years before selling off just before the event, said Tanvir Sandhu, chief derivatives strategist at Bloomberg Intelligence. This year, though, concerns about the US economy and pace of Federal Reserve interest-rate cuts are more in the forefront of investors’ minds, at least for now, options pros say.
Some of the implied volatility premium relative to realized market swings may be due to the good performance of the S&P 500 and other benchmark equity indexes, which has led to demand for protection, Pierre de Saab, head of alternative investments at Dominice & Co., said Tuesday at the Bloomberg Intelligence Volatility Forum in New York. As for the election, de Saab said he doesn’t see it “as an extreme event of any kind, compared to, say, Brexit,” which would spur a burst of options activity.
At the same time, the growth of shorter-term options means investors aren’t hedging far in advance for an event, but rather focusing on nearer-term occurrences, such as US jobs data coming later this week.
There’s “not a ton of focus on the election yet,” according to Chris Murphy, co-head of derivatives strategy at Susquehanna International Group. “If you’re looking to have an opinion on the direction of something on the election, you know, you’re not going to buy it three months in advance anymore. You’re going to wait and see.”
Despite the election being closely contested, there hasn’t been a big increase in so-called tail hedges to position for shocks, according to Murphy and Will Bartlett, CEO of Parallax Volatility Advisors.
The biggest flows are coming from volatility sellers, he says, reflecting bets that the premium traders receive for options will more than offset any potential loss from market swings. Other investors are picking up short-dated puts, Bartlett said. Those contracts would help to limit losses from a steep selloff.
One area where some investors are positioning for the election is the solar industry, where there is “a clear dichotomy between the two candidates,” Murphy said. A day or two before the presidential debate in July, he saw buying in clean energy ETF calls, which would benefit from a Kamala Harris administration likely more supportive of clean energy. They were sold the next day after the sector rallied on Harris’ perceived winning performance, boosting the value of the contracts.
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