Source: Bloomberg; Compilation: Deng Tong, Goldman Sachs

In the global financial markets, options traders are preparing to place bets related to the US elections once the Federal Reserve policy statement concludes.

The intense presidential election has gradually faded from people's view, with investors now focusing on the Fed meeting on September 18. Any policy missteps could disrupt the already jittery market due to signs of economic slowdown.

Rocky Fishman, founder of derivative analysis firm Asym 500, said: "The market's recent focus is likely on the Fed and the start of the rate-cut cycle. Although stock options are priced with higher risks around the election day, trading volumes related to election-expiry dates are limited."

Traders are also waiting for the debate between Kamala Harris and Donald Trump on Tuesday before determining the election winner. Investors will analyze the candidates' positions on issues such as tariffs, immigration policy, and corporate taxes.

Just as the Fed has hinted at a willingness to cut rates, raising tariffs and strengthening trade restrictions could push up inflation. Meanwhile, Goldman Sachs strategists suggest that Harris's proposal to raise the corporate tax rate from 21% to 28% could reduce the earnings of S&P 500 index component companies by about 5%.

The following is the positioning of the options market in stocks, currencies, and other markets:

Stocks

The contracts of the Chicago Board Options Exchange (Cboe) Volatility Index (VIX), the panic index on Wall Street, appear to be milder than they were four years ago. The distortion of the VIX forward curve has diminished, with October futures (measuring the volatility of November Standard & Poor's 500 index options) selling at a much lower premium relative to September and November contracts than in 2020 or 2016.

The implied premium of the VIX for the election is relatively small: the premium for October has decreased compared to September, lower than the past two election seasons.

Steve Sosnick, Chief Strategist at Interactive Brokers, said, "Other than continued buying of October VIX futures, we haven't seen specific positions leading up to the election. The open interest isn't particularly large, which means that most of the price increase is defensive rather than reflective of significant hedging demand."

However, according to Garrett DeSimone, Director of Quantitative Research at OptionMetrics, the implied volatility of the Standard & Poor's 500 index for the election has continued to increase, especially since early August, and reached over 1.5% last week.

Stuart Kaiser, Head of Citigroup's global market USA stock trading strategy, wrote in a report, "The election result is likely to be a 50/50 outcome, so we will focus on holding volatility rather than taking directional views. Implied volatility tends to rise as election day approaches, so if there is a relief in volatility next month, we will take the opportunity to buy options or trade calendar spreads to reduce costs."

Currency

Forex options traders also appear optimistic - they are preparing for a tightly contested election and implying that if Trump is re-elected, the risk of trade disruptions will diminish.

To gauge the election risk premium in currency market pricing, traders can now look at the difference between the three-month implied volatility (capturing the voting day on November 5th) and the one-month term (not yet captured) for a given exchange rate.

The euro and the renminbi are the two currencies most likely to be affected by higher tariffs in the Trump 2.0 era. However, the difference in volatility between the common currency and offshore renminbi for three months and one month is still within the normal range.

The renminbi volatility has not yet reflected election anxiety: the spread between the 3-month and 1-month US dollar / offshore renminbi implied volatility.

For the renminbi, this spread is currently about 80 basis points, lower than the level in July. For the euro, the spread is currently about 45 basis points, also significantly lower than the range since mid-2023. In the case of the renminbi, its readings lag behind similar readings in the 2020 and 2016 election cycles.

As the election date approaches, and more campaign activities, interviews, and presidential debates force each candidate's views to be made public, this situation may change. The one-month implied volatility indicator will naturally spike in early October, as it did in 2016 and 2020.

Cryptos

John Divine, director of OTC trading at BlockFills, a trading and technology company in the digital asset space, said that bitcoin's positioning is unusually muted in the short term.

"The current bet is bearish before October 25th, and slightly bullish before the election," he said."When we look at November, we start to see that the bid price of bullish options is higher than that of bearish options, but that is not the case, which is quite surprising to me. This suggests that there is a lot of fear in the market right now."

Recently, the trend of Bitcoin has been bearish. Source: Amberdata.

Devon said that although Trump is generally more favored by the cryptos market, the line between who supports cryptos more is becoming increasingly blurred.

"I think the market is not entirely focused on who will win in November," he said. "What is more important is that they are using this story to promote a bearish narrative that is in line with the current position."