Just days before the U.S. election on Tuesday, Wall Street is still on edge. But it looks like some traders are betting ahead of time that there will be a relief rise once the vote counts are in.
In other words, on Friday, more put options tied to the Cboe Volatility Index (VIX -4.46%), which is known as Wall Street’s “fear gauge,” were traded than call options. According to data from FactSet, by the time the market ended, more puts were bought than calls. This was the biggest difference seen in four years.
That means that a lot of traders think the VIX will go down in the coming weeks. However, there are still more open interest in VIX calls than open interest in VIX puts.
A big event for markets in the past week, the October jobs report, came and went without changing the Federal Reserve’s view that lower interest rates are needed because the job market is cooling. This late-week rise was likely caused in part by that.
There were also signs that Kamala Harris, the Democrat, had gained ground in the polls at the last minute, which made options traders feel better, according to Charlie McElligott, a cross-asset analyst at Nomura.
McElligott says that a Harris win and a divided Congress would be the best result for the markets because it would “kill volatility” for both stocks and bonds.
Since the Federal Reserve’s big interest rate cut in September, Treasury yields TMUBMUSD10Y 4.287% have been going up. Concerns about U.S. deficit spending and a possible rise in inflation have caused them to rise, which has helped push the ICE BofAML MOVE Index to its highest level since October. The gauge does the same thing for bonds that the VIX does for stocks: it measures predicted volatility in the bond market.
Aside from the VIX complex, players in options were still very nervous before Tuesday’s vote. On Monday, the VIX was going up while the S&P 500 SPX 1.05% kept going down after losing money for the second week in a row on Friday. According to FactSet, the VIX was trading at 22.44 and the S&P 500 was down 0.2% at 5,719 at the time of writing. Options that are tied to the S&P 500 and are set to expire in about one month decide how high or low the VIX is.
LSEG data showed that the MOVE index has gone down since last week, but it is still close to its best level since October 2023.
McElligott said that the so-called “put skew,” which compares the demand for out-of-the-money puts tied to the S&P 500 to the demand for at-the-money contracts, has continued to rise. This suggests that investors are still putting a high value on contracts that could protect their portfolios from a greater selloff.
On top of that, the VIX has been very sensitive to changes in the S&P 500 lately. FactSet data showed that the Cboe VVIX, which shows how much people want options contracts that are tied to the VIX, is still close to its highest level since August.
Ultimately, all of this stress could help make markets go up once the risk has passed, according to McElligott, who wrote about his thoughts in an email to MarketWatch on Monday.
Of course, just like in real life, there are no promises in the market. McElligott said that stocks could still fall if a “blue sweep” happens.
If that happened, Harris would be able to push for tax increases, more rules, and other policies that are likely to be bad for markets.
But studies show that this is still not likely to happen, and McElligott said that key Senate races continue to favor Republicans.
If former President Donald Trump wins, the Federal Reserve is likely to become more aggressive, even if Republicans don’t take over the whole government. This is because Trump wants fiscal policy to stay “run hot.”
Prices for out-of-the-money call options are still much more reasonable than prices for puts. This means that traders who want to ride the rally through options still have a lot of choices to do so, McElligott said.
McElligott thinks that sophisticated funds, such as those that use so-called “volatility control” techniques, will put more money into stocks after the election is over and the VIX goes down.
That should help spark a surge in November and December, like these kinds of events often happen before elections.
It’s not just McElligott who thinks stocks will “melt-up” in the last few months of the year. Wall Street strategists at Goldman Sachs Group, UBS Group, and other firms think prices will keep going up until the end of the year.
