Options market signals
little fear of election-tied volatility
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[July 09, 2016]
By Saqib Iqbal Ahmed
NEW YORK (Reuters) - The November U.S.
presidential election is being sold by the major parties as a defining
moment for the next generation of Americans. But stock and options
traders, often moved to action by political headlines, are responding
with a big 'meh.'
Options bets on volatility around the Nov. 8 election are running lower
than could be expected given how stocks have performed in past election
cycles, BNP Paribas said.
Typically, stock market volatility picks up around presidential
elections. Traders use options to guard against outsized market reaction
to such events.
The CBOE Volatility Index, the most widely followed gauge of near-term
investor anxiety, had some big spikes this year, hitting a four-month
high after the Brexit vote. But there is little to suggest that November
is a big worry for stocks.
Investors are focused on the quarterly earnings season starting next
week. They might also be taking the view that both the Republican and
Democratic prospective nominees would be more favorable for business
than the current administration, analysts said.
"It's like the opposite of 'Alien vs. Predator,'" said Mark Sebastian,
chief investment officer at volatility arbitrage hedge fund Karman Line
Capital in Chicago, referring to the 2004 American science fiction film
which had the tagline 'whoever wins, we lose.'
"Here, no matter who wins, Wall Street does better," he said.
Despite being called anti-business by some on Wall Street, the Obama
administration has been in power over one of the best presidential
cycles for stocks on record.
WHERE IS THE FEAR?
Per BNP Paribas data, S&P 500 Index options forward implied volatility,
which measures volatility expectations embedded in options, shows no
dislocation over the remaining election campaign period.
Had there been a big bump-up in this measure for November it would have
been a sign that traders were loading up on protective contracts.
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A Wall St sign hangs on a post outside of the New York Stock
Exchange (NYSE) in New York, U.S., July 5, 2016. REUTERS/Lucas
"The market is not ascribing a large probability to a high volatility scenario
over the election period," said Stewart Warther, an equity derivatives
strategist at BNP Paribas.
Market-makers, or dealers which quote prices for options, are also not
expressing a great deal of anxiety over stock gyrations.
If stock volatility does not pick up in November, that would be a departure from
the norm, according a BNP Paribas analysis of data going back to 1948.
"The shape of the (volatility) curve definitely is upward sloping but it's not
like there is a huge hump out in November," said Steve Sosnick, an equity risk
manager at Timber Hill, the market-making unit of Interactive Brokers Group Inc.
"We have seen some demand for options but I would say it's hardly a frenzy."
(Reporting by Saqib Iqbal Ahmed; editing by Rodrigo Campos and Richard Chang)
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