Some bullish trades before and after the U.S. presidential election are being closed as the prospect of a slowdown in the pace of interest rate cuts has restrained the stock market rebound.
One of the trades is to buy put options on the Chicago Board Options Exchange Volatility Index (VIX), as some traders bet that volatility will decrease as the uncertainty surrounding the presidential election is resolved and the stock market rises. When the VIX falls below 14, put options with strike prices of 15, 14, or even 13 are rewarded, as the cost of options has decreased so much in the initial days that the drop in volatility is still insufficient to increase the value of the contracts.
Although the relief brought by the rapid resolution of the presidential election led to a historic high for U.S. stocks earlier this month, the market's focus has since shifted to interest rates, earnings, and the specific operations of the new government. The S&P 500 index fell 2.1% last week.
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said, 'As the initial rebound begins to fade, traders are realizing that the 'red wave' has brought significant uncertainty.'
U.S. tech stocks were under pressure last Friday as investor positions shifted from extremely bullish at the beginning of November. Nvidia, a leader in the field of artificial intelligence and the largest company in the S&P 500 by weight, saw a large sell-off of call options that expired last Friday, just days before the company was set to announce its earnings.
Murphy stated, 'We see investors reducing their long exposure to large tech stocks and making speculative bets on biotechnology and consumer staples stocks, which may be affected by Trump’s policies.'
In biotechnology companies, this shift in positions is more pronounced as the stock prices of vaccine manufacturers were hit after the nomination of famous vaccine skeptic Robert F. Kennedy to lead the Department of Health and Human Services.
According to Daniel Kirsch, head of options at Piper Sandler, the one-month implied volatility and put skew of the SPDR S&P Biotech ETF have nearly reversed all the declines following the election. Investors bought put contracts on this ETF.
According to Kirsch, concerns over tariffs have also led investors in European ETFs to begin hedging. 'The enthusiasm since the election has begun to wane as the market struggles to cope with the appreciation of the dollar, rising interest rates, and the recent cabinet appointments of the new Trump administration.'
Article reposted from: Jin Shi Data