Stocks to Crypto Investors Prepare for US Election Volatility

Coming just ahead of what was seen as a bitter US election, options traders across all markets appear to be reducing risk and bracing for more volatility. Stock options volatility rose through much of October, although market movements were muted in anticipation of not only the upcoming election but also earnings season and the Federal Reserve’s interest rate decision. The race between Kamala Harris and Donald Trump is too close to call in the final days before the vote.

Bond yields have been rising since the Fed cut rates in September, prompting investors to exit some futures positions and add tail risk hedges at higher rates. For the most part, currency traders are betting on broader swings, with volatility rising in the yuan, Mexican peso and euro due to uncertainty over trade and tariffs.

“The position is pretty clean” after some general de-risking in the last few weeks before the election and the Fed meeting, said Stuart Kaiser, U.S. equity trading strategist at Citigroup Global Markets Inc. – This is good for the risk-reward ratio after the elections, depending on the result of course. Bonds seem to be moving more than stocks.”

Here’s a look at how options traders position themselves across various asset classes, from stocks to cryptocurrencies:

Stock

As expected, much of the election hedging came at the last minute, as short-term options make it easier to position closer to the event. Implied volatility is well above realized levels and investors are bracing for wider swings even though the S&P 500 has gone 29 sessions without falling more than 1%.

“We continue to see increased trading interest around the election, which has intensified in recent days,” said Daniel Kirsch, head of options at Piper Sandler & Co. “As clients who expect Donald Trump to win the election are increasing risks to financials and crypto stocks, those betting on a Harris victory are buying options on renewable energy stocks. There has also been an increase in hedging, with traders investing put options on the S&P 500 and the QQQ ETF.”

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Short-term implied volatility for the S&P 500 has risen sharply from monthly levels as the election and Fed hike impact the calculation of the short-term measure. The Cboe VVIX Index, which measures the volatility of the VIX, is also elevated.

“Currently, options skew is very high, and the VIX is much higher than realized volatility,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management. “These are signs that the market is well hedged at the moment.”

While volatility has increased, it points to a move of about 1.7% in the S&P 500 the day after the election, rather than an outrageous swing. The implied move has gradually declined from a peak of about 2% in early October and is roughly in line with the long-term average over the past election, said Stefano Pascal, head of U.S. equity derivatives strategy at Barclays Plc.

In addition to the overall indices, some sectors, such as crypto and clean energy stocks, have seen a spike in volatility well above their median values. Cryptocurrency stocks are up nearly 10%, Morgan Stanley’s trading desk said last week, while renewable energy stocks are up about 6%. This is reflected in positioning: for example, last week at Sunrun Inc. Over 20,000 November call spreads were purchased.

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Following the election, fundamental market flows provide support for the rally through the end of the year as hedges are removed, mutual fund buying begins in November, companies repurchase shares, and lower volatility leads to systemic buying and options rehedging. dealers.

“Assuming a smooth post-election period, we think these hedges could weaken and we could see a sharp drop in the VIX and a flatter skew,” Ren said. “If both happen, it could bring more buyers into the market and push the market higher.”

Forex
Short-term currency options, which are now pricing in election risk, saw an implied jump in volatility in anticipation of broader swings following the US vote. Weekly movements in the dollar-yuan exchange rate hit a record high late last week as traders hedged against the possibility of higher US tariffs threatened by Trump and a global trade war that could particularly hurt China.

Euro volatility, which is also vulnerable to any trade tariffs that a Trump victory might entail, has risen the most since 2020, reaching its highest level since March 2023, while risk reversal remains bearish on the euro versus dollar. The peso’s weekly volatility hit its highest level in more than four years, and its premium to expected movements further widened to its highest level since Bloomberg began collecting data in 2007.

Prices
Positioning in the Treasury market over the past few weeks has been focused on traders trimming futures positions, leaning toward liquidating long positions amid rising expectations for more fiscal stimulus after the election, which has led to increased supply of Treasuries. As a result, open interest, or the number of positions taken by traders, has fallen sharply in 10-year bond futures since early October as yields have risen.

Crypto
Crypto traders are divided on the outcome of the election: the options market is turning from aggressively bullish to a more hedging-oriented approach. According to data compiled by cryptocurrency liquidity provider B2C2, the implied volatility of short-term contracts such as 14-day put options has increased significantly, while calls with the same expiration remain stable.

While there is no clear directional shift with increased volatility ahead of the election, increases in premiums for longer-term calls and Bitcoin futures on the CME point to a bullish outlook post-election, with further rate cuts and potential positive changes in cryptocurrency policy . next year.