Jitong Finance App noticed that just before the fiercely competitive and evenly matched US presidential election, options traders in various markets seem to be reducing risks, preparing for more volatility.

Although market volatility has been low, most of October saw an increase in stock options volatility, as the market anticipates not only the upcoming elections but also earning seasons and the Federal Reserve interest rate decisions. In the final days before the vote, the competition between Kamala Harris and Donald Trump is unpredictable.

Since the Fed's rate cut in September, bond yields have been rising, leading investors to pull back some futures positions and increase tail risk hedging as rates rise. In most cases, forex traders are betting on larger volatility, with the volatility of the Renminbi, Mexican Peso, and Euro intensifying due to trade and tariff uncertainties.

Citigroup's Global Financial US Stocks Trading Strategist Stuart ST Kevin stated that in the past few weeks of elections and Federal Reserve meetings, the market has generally reduced risk, therefore the 'positioning is quite clear'. 'This is certainly conducive to post-election risk/reward, of course, depending on the election results. Bonds seem to have greater volatility than stocks.'

Here is the position of options traders in various asset classes, from stocks to cryptos:

Stocks

As expected, most hedging for the election occurred at the last minute, as short-term options make hedging easier just before the event occurs. Implied volatility is much higher than the actual level, despite the S&P 500 index having a consecutive 29 trading days of less than 1% decline, investors are still preparing for larger volatility.

Piper Sandler & Co. options head Daniel Kirsch said, "We continue to see interest in election trading, which has increased in recent days. Clients who are expected Donald Trump to win the election are increasing their investments in financial and crypto stocks, while clients betting on Harris' victory are buying options on renewable energy stocks. Hedging trades have also increased, with traders buying put options on the S&P 500 index and QQQ ETF."

The short-term implied volatility of the S&P 500 has been at high levels relative to a one-month level, as the impact of the election and the Fed's interest rate hikes seeps into the calculation of short-term indicators. The Cboe VVIX index, which measures VIX volatility, is also at high levels.

Zhiwei Ren, portfolio manager at Pennsylvania Joint Asset Management, said, "Currently, there is a significant skewness in options, with VIX far exceeding actual volatility. These signs indicate that the current market hedging measures are in place."

Although volatility has increased, this indicates that the S&P 500 index will experience approximately 1.7% volatility on the second day after the election - not a large amount of volatility. Stefano Pascale, head of equity derivatives strategy at Barclays Bank in the USA, said that implied volatility has steadily decreased from a peak of around 2% in early October, roughly in line with the long-term average level from past elections.

In addition to general indices, the volatility of sectors such as cryptos and clean energy stocks is also much higher than the median. Last week, Morgan Stanley's trading department stated that the volatility of crypto stocks is close to 10%, while the volatility of renewable energy companies is around 6%.

After the election ends and hedges are removed, mutual funds are buying back stocks starting in November, companies are buying back shares, and the reduction in volatility is attracting systematic purchases and re-hedging by options traders, providing support for a year-end rebound in the fundamental market flow.

"Assuming everything goes smoothly after the election, we believe these hedges may be lifted, and we may see a significant drop in VIX and a leveling off of skewness," Ren said. "If both happen, it may force more buyers into the market, driving up the market."

Forex

Short-term forex options have now priced in the election risks, with implied volatility surging significantly, as expectations for increased volatility after the US election rise. The weekly volatility of the US dollar against the Chinese yuan hit a historical high last week, as traders hedged the possibility of Trump threatening to increase tariffs on the US and possibly inflicting severe damage on China in a global trade war.

The euro's volatility, also susceptible to any impact of Trump's potential reelection bringing any trade tariffs, has seen its largest increase since 2020, reaching the highest level since March 2023, while risk reversals continue to be unfavorable for the euro against the dollar. The weekly volatility of the peso has climbed to its highest level in over four years, with the premium on expected future volatility expanding to the highest level since Bloomberg began compiling data in 2007.

Bonds

In recent weeks, positions in the US bond market have mainly focused on traders reducing futures leverage ratios, with long positions tending to close out as expectations rise for post-election fiscal stimulus measures and increased US Treasury supply. As a result, since early October, with yields rising, open interest in 10-year US Treasury futures (the number of positions held by traders) has significantly decreased.

De-risking, where traders withdraw chips, is also reflected in the spot market. JPMorgan's latest survey shows that with an increase in neutral options, customers have reduced both long and short positions. In the US Treasury options market, tail risk hedges are at current levels of high yield and significant selling in the bond market. The December 10-year put option at 109.50 is particularly popular, equivalent to a yield of about 4.5%, about 25 basis points above current levels.

Bloomberg Intelligence's Chief Global Derivatives Strategist Tanvir Sandhu said: "Election volatility premium is most pronounced on long-term interest rates in the bond market, reflecting concerns about higher fiscal risks that the election outcome may bring." "This skew indicates demand for using payer swaptions to hedge the decline in long-term interest rates."

Cryptos

Cryptocurrency traders have varying views on the election results, with the options market shifting from a bullish stance to a more hedging-oriented approach. According to data compiled by cryptocurrency liquidity provider B2C2, the implied volatility of short-term contracts like 14-day put options has surged significantly, while call options of the same maturity remain stable.

Despite increased volatility as the election approaches, there is no clear directional bias, but the premiums of longer-term call options and the Chicago Mercantile Exchange (CME) futures continue to rise.$Bitcoin (BTC.CC)$indicating a bullish outlook after the election, with the potential for more rate cuts next year and positive changes in crypto policies.

Cross-asset

Binary options - if certain conditions are met, such as currencies and stocks reaching predetermined levels, triggering payouts - are often a popular way to hedge against potential outcomes of major events. Morgan Stanley derivatives strategist Esmail Afsah stated that such trades have increased during the elections.

"I suspect this is mainly because investors have a strong view on how individual assets will perform in the four key stages of the U.S. election," Afsah said. "Using a combination of options and betting on the directions of two assets simultaneously can significantly increase leverage ratio, thus enhancing the odds of winning, provided that the assets' performance does indeed meet expectations."

Editor/ping