The Cboe Volatility Index, a gauge of options prices, surged the most in more than a year last week as stocks sank with growing calls for Joseph Biden to quit the presidential race. Now that he’s done so and thrown US politics into uncharted territory, futures on the gauge have slipped after earlier climbing as much as 1.8% in Asian trading. October contracts, which measure swings around the vote, rose even more in Hong Kong.
Should Vice President Kamala Harris become the Democratic nominee, risk pricing is likely to look similar to what it was before Biden’s debate against Donald Trump, according to Stuart Kaiser, head of strategy at Citigroup Global Markets.
“Policy continuity means she is the closest proxy for Biden among the alternatives so the volatility pricing will look very similar,” Kaiser said. “Perhaps with a bit more risk premium given the late change and recent events on the Trump/GOP side of things.”
After shunning protection against a selloff that never happened in the first half of the year, traders are now switching modes. Beyond politics, they’re watching whether technology company earnings can support still-lofty valuations – Tesla Inc. and Google’s parent Alphabet Inc. are reporting this week – while chatter on when the Federal Reserve will start to lower interest rates will remain in focus.With increased chances of Trump winning the presidency largely baked in, positioning in the rates market is shifting to gauge the chances of a cut at the end of this month or a bigger one in September.Stocks Can Go DownSome of the froth has come out of the stock market as earnings ramp up.
Just a couple of the biggest tech companies have a positive call skew when bullish options are more expensive than bearish ones according to Scott Nations, president of volatility and options index developer Nations Indexes.
That’s a sharp change from earlier this month, when seven out of the top 10 stocks in the S&P 500 did, he said.
“It seems investors have finally figured out that stocks can go down too and want protection,” Nations said.
The VIX ended last week at its highest level since April, and the cost of options on the gauge often used to hedge against sharp market selloffs also hit a three-month high. More than 170,000 August calls betting the VIX would go to 21 traded, for a level the index hasn’t reached since October.
When it comes to equity options, not only have puts been bid up, but calls are also under pressure, according to Nations. His company’s index of call volatility was down 6.3% on Friday. That may be a sign traders are willing to risk being short bullish contracts, expecting implied volatility to ease if the S&P 500 rebounds.