FX168 Financial News (North America) News Options traders are betting heavily on riskier stocks on the US stock market, supporting a rebound in anticipation that election fears will gradually subside and that the Republican Party will control power in Washington next year.
The bullish action involved assets ranging from electric car maker Tesla to small-cap stocks and regional banks. Together, they have helped the S&P 500 rise 3% since the November 5 vote.
“We have been mitigated from this huge risk,” said Garrett DeSimone, head of quantitative research at OptionMetrics. “It's simply all-around... everything is rising except bonds.”
Options traders took a defensive stance ahead of the election to hedge against possible election-related fluctuations in their portfolios, including concerns that the results might be too close or controversial.
Many are now turning to bullish positions, fearing that the market is not performing well. After Trump won and the Republican Party took control of both houses of Congress, the market rebounded. The Republican Party was expected to control both houses of Congress after the election, and Edison Research predicted this result on Wednesday. The election results are expected to give the Republican Party more freedom to pursue its economic agenda, including tax cuts and deregulation.
Charlie McEligott, managing director of cross-asset strategy at Nomura Securities, said in a report earlier this week that investors “panicked to chase historically high stocks.”
Trade Alert data shows that the ratio of daily call options (profit when stocks rise) trading volume to put options trading volume is 1.5 to 1, compared to 1.3 to 1 for the rest of the year.
Deutsche Bank said there was a sharp rise in net bullishness in single stock options in most industry categories after the election.
More broadly, the volatile landscape changed dramatically, and the Chicago Board Options Exchange Volatility Index (a measure of portfolio protection needs) fell to a nearly four-month low of 13.67.
Michael Thompson, co-portfolio manager at investment firm Little Harbor Advisors, said: “The concerns of the volatile market have not been realized, so all excessive concerns have disappeared from the market.”
McEligott noted increased demand for call options on a range of stocks, including iShares Russell 2000 ETF ARK Innovation ETF, SPDR S&P Regional Banking ETF, and VanEck Semiconductor ETF.
The shift from worry to upward speculation is evident in Tesla's options. As the stock soared after the election, investors are buying call options because investors are betting that CEO Elon Musk's close relationship with Trump could benefit the electric car maker.
According to data from Nomura Securities, Tesla options accounted for about 30% of total US stock options transactions on Monday.
Analysts said the overall boom in call options among investors could help drive the share price higher.
OptionMetrics' DeSimone said, “When you see these investors flock to call options... this information is transferred to the stock, and then you see the stock itself rise.”
Optimism has abated
Of course, as the timing and implementation details of the Republican policy agenda become more clear, the so-called Trump deal is likely to see twists and turns. Investors are also concerned that parts of Trump's economic platform, such as tax cuts and tariffs, may trigger inflation.
Some of these concerns are reflected in the recent rise in US Treasury yields, which could be hurting the stock market if this continues.
Federal Reserve Chairman Jerome Powell said that given the strong economy, there is no need for the Federal Reserve to cut interest rates hastily, and the stock market fell on Thursday. He added that the impact of Trump's policies on economic growth will not become apparent until new laws or executive orders are approved or enacted.
This may be one reason why some indicators of investor enthusiasm are still far from reaching the level of fervor in the past when the market rebounded.
For example, one measure of the slope of the S&P 500 index relative to demand for call options and put options has dropped from 7% before the election to 4%, indicating that investors' defenses have weakened. But since this year, the indicator has been even lower, including 3% in May.
“It shows that the market has maintained a degree of prudence rather than showing complete complacency,” DeSimone said.
