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Investors from stocks to crypto brace for U.S. election swings

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Just before a hotly contested U.S. election considered a toss-up, options traders across markets appear to be reducing risk and bracing for more volatility.

Equity options volatility climbed through most of October even as the market’s swings were muted, in anticipation of not just the upcoming election but also earnings season and a Federal Reserve interest-rate decision. TheBond yields have been rising since the Fed cut rates in September, leading investors to pull back on some futures positions and add tail-risk hedges on higher rates.

While volatility has been elevated, it’s pointing to about a 1.7% move for the S&P 500 the day after the election — not an outrageous swing. The implied move has fallen steadily from a peak of around 2% in early October to be about in line with the long-term average for past elections, according to Stefano Pascale, head of US equity-derivatives strategy at Barclays Plc.

“Assuming a smooth post-election period, we believe these hedges may unwind and we could see a sharp drop of VIX and flatter skew,” said Ren. “If both happen, it could force more buyers into the market and push the market higher.”Short-term currency options that are now pricing in risk around the election have seen an implied volatility jump in anticipation of wider swings after the U.S. vote.

While there is no clear directional bias with heightened volatility going into the election, increasing premium for calls across longer tenors and termed Bitcoin futures on CME point to a bullish outlook beyond the election, with more rate cuts and potential positive changes in crypto policies in sight next year.

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