2020 Election: VIX Options Show Quick Election Resolution, RBC Says; Hedge funds bet against lasting US election-induced market turmoil

Nov 3, 2020

Observations & Insight

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Tony Drake and Peter Mulmat

Lead Stories

2020 Election: VIX Options Show Quick Election Resolution, RBC Says
Bloomberg (VIDEO)
In today’s “Futures in Focus,” Amy Wu Silverman, managing director and equity derivatives strategist at RBC Capital Markets, examines market volatility related to the 2020 U.S. presidential election. She speaks on “Bloomberg Markets.”

Hedge funds bet against lasting US election-induced market turmoil
Eric Platt, Robin Wigglesworth and Laurence Fletcher – Financial Times
Some hedge funds are betting that fears over a delayed and disputed US presidential election result are overblown, and that stock market volatility will simmer down in the coming months.
The Vix volatility index, which measures near-term expected swings in S&P 500 equities — as implied by options prices — climbed for much of October over coronavirus nerves and the approaching US presidential contest. It stood at 35 on Tuesday, compared with a long-run average of about 20.

Investors pine for a ‘clear victory’ — what’s at stake for markets in Trump-Biden election showdown
William Watts – MarketWatch
After all, it could be a topsy-turvy week for investors as remaining voters go to the polls on Tuesday, with little certainty over when a victor in one of the most bitter and most litigated presidential elections in U.S. history will be declared.Here’s a look at what investors in stocks and other assets are bracing for in the electoral aftermath:

Spiking Volatility in China Shows Global Markets Are Nervous
Sofia Horta e Costa and Joanna Ossinger – Bloomberg
Metric tracking implied yuan swings surges before U.S. vote; Measures of expected volatility elevated in stocks, bonds
China’s currency markets are on edge like never before, a sign of the anxiety afflicting investors globally as they gird for election day in the U.S. and its potentially contentious aftermath.

*****JB: Also see the Financial Times story, Traders prepare for storm of election-fuelled tumult in China’s currency.

Bitcoin’s Implied Volatility Rises Ahead of US Election
Omkar Godbole – Coindesk
Both bitcoin and traditional market investors look to be predicting a pick-up in volatility following the U.S. elections. The cryptocurrency’s one-month implied volatility – investors’ expectation of how turbulent prices will be over the next four weeks – has risen to a two-week high of 59% in the past three days, according to data source Skew.

Spiking Volatility in China Shows Global Markets Are Nervous
Sofia Horta e Costa and Joanna Ossinger – Bloomberg
China’s currency markets are on edge like never before, a sign of the anxiety afflicting investors globally as they gird for election day in the U.S. and its potentially contentious aftermath.
The offshore yuan’s one-week implied volatility — a proxy for market risk — more than doubled in the past week to the highest since Bloomberg began compiling the data in 2011. The overnight tenor is also elevated, surging on Tuesday to a more than two-year high.

The world’s biggest wealth manager says investors should weather election volatility because vaccine progress will help corporate earnings fully recover by year-end 2021
Emily Graffeo – Markets Insider
While the US election is causing high levels of near-term uncertainty in the stock market, UBS says investors should hold steady through the volatility because 2021’s outlook remains positive.

Exchanges and Clearing

OCC October 2020 Total Volume Up 41.1 Percent from a Year Ago
Chicago – OCC, the world’s largest equity derivatives clearing organization, announced today that October 2020 total cleared contract volume was 636,709,236 contracts, up 41.1 percent from October 2019. This marks the highest October ever and the fourth-highest month on record. Year-to-date average daily cleared contract volume through October was 28,862,569 contracts, up 46.3 percent from October 2019.

CME Group Reports October 2020 Monthly Market Statistics
CME Group
CME Group, the world’s leading and most diverse derivatives marketplace, today reported October 2020 market statistics, including average daily volume (ADV) of 15.4 million contracts during the month. Market statistics are available in greater detail at https://cmegroupinc.gcs-web.com/monthly-volume.

Eurex Clearing expands incentives to switch OTC swap portfolios into the EU
Eurex Clearing
Eurex Clearing has strengthened its CCP Switch Incentive Program and extended it until June 2021. A complete waiver of booking fees for OTC interest rate swaps (IRS) and overnight index swaps (OIS) applies for banks and institutional investors for portfolios transferred to Eurex Clearing. Additionally, Clearing Members receive on the back of such portfolio transfers a substantial fee rebate voucher on future transactions in OTC interest rate derivatives. By switching a swaps portfolio of 250 billion EUR, a Clearing Member would realize an economic benefit of up to 1.5 million EUR.

Cboe Global Markets to Present at the Bank of America Future of Financials Virtual Conference Tuesday, November 10
Cboe Global Markets, Inc., a market operator and global trading solutions provider, announced today that Ed Tilly, Chairman, President and Chief Executive Officer, and Brian Schell, Executive Vice President, Chief Financial Officer and Treasurer, will present at the Bank of America Future of Financials Virtual Conference on Tuesday, November 10 at 11:20 a.m. ET. The webcast and replay of the virtual presentation will be accessible at www.cboe.com in the Investor Relations section, under Events and Presentations. The archived webcast is expected to be available within an hour of the presentation.

Cboe Sees Opportunities in Growth Of Retail
Shanny Basar – Cboe
Strong growth in retail participation helped one of Cboe Global Markets’ US equities exchange reach a record market share in the third quarter and the exchange sees opportunities for retail to start trading its derivatives. The exchange reported today that net revenue for the third quarter was $292m (EUR250m), down 1% from a year ago. Total trading in U.S. equities rose 26% year-on-year in the third quarter.


This Stock Options Strategy Should Generate Gains No Matter What Happens in the Election
Steven M. Sears – Barron’s
In America, presidents come and go every four years, but the stock market reigns forever.
Rather than waiting to learn the results of Tuesday’s presidential election, consider an options trading strategy that works if the stock market sinks or rallies in reaction to the result or lack of a conclusion. All that is needed to make this approach work is to have convictions about the long-term trajectory of the stock market that are at least as strong as political convictions.

S&P 500 ETF May Slump 8% in Contested Election, Susquehanna Says
Katherine Greifeld – Bloomberg
There are hints in the options market that anything but a clear winner in this week’s U.S. presidential election could spell trouble for stocks.
At-the-money straddles on the SPDR S&P 500 ETF Trust (ticker SPY) — a strategy that entails buying a put and a call option at the same strike price and expiry date — currently imply a 4.2% move by Friday. Given PredictIt’s 75% odds that a winner will be declared by the end of the week, that suggests SPY could plunge by 8.4% should the results be contested, Susquehanna International Group’s Chris Murphy wrote in a note Monday. That compares with a 2.8% advance on a clear winner.

The U.S. could split up, Gundlach says. Here’s how he’d invest for that.
Andrea Riquier – MarketWatch
Donald Trump is most likely to win re-election, but no matter the outcome of the presidential race, the U.S. could find itself broken into more than one country as unrest and acrimony grip the electorate, noted investor Jeffrey Gundlach said Monday.
Speaking on a webcast hosted by Rosenberg Research with its founder, David Rosenberg, Gundlach said he had “far less conviction” about Trump than in 2016, when he was one of a handful of people taking Trump’s long-shot candidacy seriously.

*****JB: Seems a bit extreme to me (the US splitting up) but then there is a reason I am not invited on webcasts like these.

Funds boost CBOT corn optimism but face virus-fuelled setback
Karen Braun – Reuters
Speculators’ overall optimism about Chicago-traded grains and oilseeds rose last week to within striking distance of record bullishness for any time of the year, and that largely owed to strong buying in corn.
But increasing pandemic fears and improving crop weather went against bulls late in the week.

Inside Volatility Trading: November 3, 2020
Kevin Davitt – Cboe blog
Twenty years ago, Malcolm Gladwell went from a respected writer for The New Yorker to a sought after “public intellectual” following the publication of The Tipping Point: How Little Things Can Make a Big Difference. His books are typically an amalgam of psychology, economics, and a bit of sociology conveyed through anecdotal lenses. In Tipping Point, Gladwell focuses on identifying the inflection points when ideas “catch fire.” The book was published a year before MySpace even existed. Social networking in 2000 was exemplified by AOL or Yahoo messenger. The topic was arguably well ahead of its time.


FIA Expo
Register now and join us virtually this November.
10 November 2020 – 12 November 2020 • 7:30 AM – 2:00 PM CST
Since March the futures community has shown its resiliency and ability to adapt to the challenges of today. Expo-V focuses on shaping what’s next in the cleared derivatives industry as we continue to move forward and change. Whether leading voices analyzing the most pressing issues or ground-breaking fintech startups, the virtual 36th Annual Futures & Options Expo is your destination to build partnerships, spot trends and define what’s next for our industry.
From keynote addresses to 1:1 interviews with exchange leaders and panels as well as the Innovators Pavilion and virtual trade show, Expo-V will bring you:
Ways to harness recent lessons learned to build a stronger tomorrow
Cutting-edge startups and new applications that are changing the face of the industry
Opportunities to diversify the industry from people to principles
Register now and join us virtually from November 10-12 for Expo-V!


World’s Biggest Credit ETF Has Just Lost the Most Cash On Record
Katherine Greifeld and Sam Potter – Bloomberg
Just hours before the U.S. election got underway, investors pulled the most cash ever from the world’s largest exchange-traded fund tracking corporate bonds.
As market volatility awakens and the pandemic hits America Inc.’s creditworthiness, more than $1.4 billion exited the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) on Monday, according to data compiled by Bloomberg. Trading activity included a single transaction worth about $250 million, though it’s unclear if that constituted selling or buying.

There’s a ‘tectonic shift’ headed for stocks, Morgan Stanley warns, thanks to a decade of slowing growth and rising wealth inequality
Emily Graffeo – Markets Insider
There’s a major shift coming for stock markets that goes well beyond the usual business cycle reversal, Morgan Stanley is warning.
A decade of slowing secular growth and rising wealth inequality, paired with the failure of monetary policies to normalize growth is leading to a “tectonic shift” in US macroeconomic policy, the Morgan Stanley Wealth Management’s chief investment officer Lisa Shalett said in a Monday note to clients.

The Money Says Prepare for a Long Night, and Week; Market-based models suggest the U.S. election is far tighter than polls would indicate.
John Authers – Bloomberg
This is a blissful moment; I am about to write my last ever piece about the U.S. elections of 2020 without the benefit of hindsight. More or less everything seems inevitable once it’s happened. From here, nothing looks inevitable. Any number of strange phenomena may turn out to be important, or may soon be forgotten. So, while the U.S. elections remain like a Whodunnit novel that is missing its last page, let me try to review what is going to happen Tuesday and the rest of the week.

*****Comfort food is a good thing for times like this. We are having Lou Malnati’s pizza tonight.~JJL

(Podcast) Option Block 948: Hunting for Election Volatility
Uncle Mike is over hedging heading into the election tomorrow. Learn more on this episode of The Option Block.
Option Block – Options Insider Network

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