Traders wake up to
hedging as election jitters jolt stocks
Send a link to a friend
[November 02, 2016]
By Saqib Iqbal Ahmed
NEW
YORK (Reuters) - With a week to go to the U.S. presidential election and
some polls showing a tightening race, political risk is suddenly back on
the radar, and equity options traders are positioning to deal with any
stock market mayhem should it arise.
Until this week, most polls showed Democrat Hillary Clinton with a
comfortable lead over Republican Donald Trump. A Reuters equity market
poll last month showed a majority of forecasters predicted that U.S.
stocks would perform better under a Clinton presidency than a Trump
administration.
Presumptions of an easy Clinton victory have been upended in the last
several days after the FBI said it was probing newly found emails
related to Clinton's use of a private server, and that has begun to roil
equity markets.
This week traders have started to load up on contracts such as CBOE
Volatility Index call options in a bid to profit from increased stock
gyrations. As of Tuesday, open VIX call contracts outnumbered puts by a
3.5-to-1 margin, the most in about six months, according to options
analytics firm Trade Alert data.
![](http://archives.lincolndailynews.com/2016/Nov/02/images/ads/current/graue_sda_june2015.png)
Positioning in contracts that expire in November is even more defensive
with more than four VIX calls open for each open put contract.
"The VIX has gone up for six straight days, so that right there tells
you that people are bidding up the prices of the options on the S&P
500," said Randy Frederick, managing director, trading and derivatives,
at Charles Schwab in Austin, Texas.
Frederick also pointed to unusually strong trading volume for options on
the VIX and the S&P 500's tracking exchange-traded fund <SPY.P> as a
sign of increased demand for hedging.
SPY options trading volume jumped to 3.8 million contracts on Tuesday,
or 1.5 times the daily average volume, according to Trade Alert.
Traders have also shown a preference for options contracts that expire
closest to the election, as these are likely to be the most sensitive to
the results.
For SPX options expiring a day after the Nov. 8 election, implied
volatility - a gauge of the risk of large moves in the index - is at
22.2 percent, the highest for any listed expiration, according to Trade
Alert data.
S&P 500 weekly contracts that expire later that week on Nov. 11 have
call contracts outnumbering puts 2-to-1, according to Thomson Reuters
data. That shows a slightly more defensive stance than for all SPX
options contracts expiring after that date.
The cost of an SPX straddle, a strategy in which a trader buys an
at-the-money put option and a similar call option, implies a move of
about 2.4 percent in either direction by Wednesday.
![](http://archives.lincolndailynews.com/2016/Nov/02/images/ads/current/ldn_business_directory_small_2016.png)
[to top of second column] |
![](../images/110216PICS/busine31.jpg)
Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., October 24, 2016. REUTERS/Brendan McDermid
![](../images/ads/current/demay_inv-lda081412.png)
Hedging activity has picked up noticeably over the last week. Until
recently there were few signs of traders hunkering down for big stock
market gyrations around the election.
While some of the pickup may simply be due to the growing proximity of
Election Day, some is likely linked to the uncertainty spurred by the
FBI news late last week, Frederick said.
Clinton held a 5 percentage-point lead over Trump, according to a
Reuters/Ipsos opinion poll released on Monday, little changed since the
FBI announcement.
But other polls showed a Trump surge. A poll by ABC News showed the
Republican leading by 1 point and the Los Angeles Times put Trump more
than 2 points ahead.
On Tuesday, Wall Street sold off sharply with the S&P 500 closing at a
near four-month low, amid growing concern over next week's election.
The CBOE Volatility Index, an options-based gauge of near-term investor
anxiety, spiked above its long-term average of 20 to hit a seven-week
high.
The spike in volatility is in sharp contrast to the record level of calm
in the market in recent weeks.
![](http://archives.lincolndailynews.com/2016/Oct/06/images/ads/current/castlemanor_lda_051916.png)
For October, the S&P 500 Index's realized volatility - a measure of how
much the stocks have actually moved - was at 6.6, the lowest for an
October in 23 years, according to an analysis by derivatives analysts at
Goldman Sachs.
(Reporting by Saqib Iqbal Ahmed; Editing by Dan Burns and Leslie Adler)
[© 2016 Thomson Reuters. All rights
reserved.] Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |