Options Markets Laser-Focused on Fed Before Election Takes Over

(Bloomberg) -- Across global financial markets, options traders are preparing to unleash a wave of wagers tied to the US election — just as soon as the Federal Reserve’s policy announcement is out of the way.

The closely contested presidential election has faded into the background with investors focused on the Sept. 18 Fed meeting. Any policy missteps threaten to roil markets already on edge over signs of slowing economic growth.

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“Markets’ primary near-term focus will likely be the Fed, and the beginning of the rate-cutting cycle,” said Rocky Fishman, founder of derivatives analytical firm Asym 500. “Although equity options are pricing higher risk around Election Day, actual trading volume in election-related maturities has been limited.”

Traders are also waiting for Tuesday’s debate between Kamala Harris and Donald Trump before cementing their bets on who will win the race. Investors will be parsing the candidates’ positions on tariffs, immigration policy and corporate taxes, among other issues.

Higher tariffs and more restrictive trade could boost inflation at a time when the Federal Reserve is just starting to signal comfort with cutting interest rates. Meanwhile, Harris’ proposal to raise the corporate tax rate to 28% from 21% could shave off about about 5% from earnings for S&P 500 companies, according to Goldman Sachs Group Inc. strategists.

Here’s a look at how options markets are positioning across stocks, currencies and other markets:

Stocks

Contracts on Wall Street’s closely watched fear gauge, the Cboe Volatility Index, or VIX, are looking more benign than four years ago. The VIX forward curve is showing less of a “kink,” with the premium for October futures — which measure volatility of November S&P 500 options — over both September and November contracts much smaller than in 2020 or 2016.

“We haven’t seen too much specific positioning ahead of the election other than the persistent bid in October VIX futures,” said Steve Sosnick, chief strategist at Interactive Brokers. “The open interest isn’t particularly large, meaning that much of the pricing bump was defensive rather than the result of huge demand for protection.”

However, the election implied move for the S&P 500 Index has been increasing, especially since the start of August, and reached above 1.5% last week, according to Garrett DeSimone, head of Quantitative Research at OptionMetrics.

“The election will likely be a 50/50 toss-up, so we would focus election trades on owning volatility as opposed to directional views,” Stuart Kaiser, head of US equity trading strategy at Citigroup Global Markets, wrote in a note. “Implied volatility tends to rise closer to Election Day, and we would opportunistically buy options when/if volatility eases over the next month or trade calendar spreads to mitigate costs.”

Currencies

Foreign-exchange options traders also appear sanguine — they are bracing for a close election while signaling a diminished risk of trade shocks in the event of a second Trump term.

To gauge the election risk premium priced in the currency markets, traders can now look at the difference between three-month implied volatility for a given exchange rate — which captures polling day on Nov. 5 — and the one-month tenor, which doesn’t yet.

The euro and the Chinese yuan are two of the currencies most exposed to greater tariffs under Trump 2.0. And yet the spread between three- and one-month vols for the common currency and the offshore yuan remain in a normal range.

For the yuan, that spread is now around 80 basis points, below July levels. For the euro, it’s now around 45 basis points, also well within its range since mid-2023. The yuan, as an example, trails similar readings from the 2020 and 2016 election cycles.

That will likely change as the date of the election approaches and as more campaign events, interviews and presidential debates force the views of each candidate into the open. The one-month implied volatility gauge should naturally see a sharp spike here come early October, as was seen in 2016 and 2020.

Crypto

Bitcoin positioning has been unusually bleak for the short term, according to John Divine, head of OTC Trading at BlockFills, a trading and technology firm in the digital asset space.

“The bet right now is bearish through Oct. 25 and slightly bullish into the election,” he said. “When we look at November, we start to see calls bid over puts but not really, and this to me is quite shocking. It shows the amount of fear in the market right now.”

While Trump is generally more favored by the crypto market, the lines are becoming a little more blurry on who is more pro-crypto, said Divine.

“I don’t think the market is totally trading on who wins in November right now,” he said. “More so, they are using that story to drive the narratives that fit into the current positioning, which is bearish.”

--With assistance from Natalia Kniazhevich, Carter Johnson, George Lei, Jan-Patrick Barnert and David Pan.