Options market signals little fear of election-tied volatility

Fri Jul 8, 2016 2:02pm EDT
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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.   Continued...

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 Jackson