Expensive Protection
In the options market, traders are paying about twice as much for two-month contracts protecting against a 5 percent drop in the SPDR S&P 500 ETF, relative to bullish ones, according to data compiled by Bloomberg. The measure reached a record on Sept. 30, the data show.
That’s happened as Clinton has built about a 5-point lead on Trump in a race that includes third-party candidates, according to the RealClearPolitics poll average. The forecaster FiveThirtyEight on Tuesday gave Clinton an 83.6 percent change of winning in its polls-only model, approaching her high of 89.2 percent in mid-August.
After closing the gap on Clinton during September, the Trump campaign has experienced setbacks in recent days, including a tape released on Oct. 7 of the Republican candidate making lewd comments about women. Now, less than a month before Election Day, the Republican party is erupting into open warfare, with Trump pledging to campaign unshackled from party leaders.
Relief Rally
“There’s some frustration about the state of political discourse in the country, and the rancor between and even within the two sides,” said John Carey, a Boston-based fund manager at Pioneer Investment Management, which oversees about $230 billion. “There’s concern about how we’re going to possibly stitch this back into one working country again. That’s weighed on peoples’ nerves and weighed on their sense of security.”
The high skew on the S&P 500 ETF stands in contrast to trading in VIX contracts, which show investors only expecting a post-election, single-day move of about 1.6 percent for the S&P 500, according to Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors in New York. That’s less than half the average following the past two presidential votes and in line with the historical average dating back to 1968.
Wall Street forecasters also don’t appear worried about the possibility of a major election-based decline. They foresee the S&P 500 finishing the year at 2,175, according to a survey of 19 strategists. That’s 1.8 percent higher than the index’s closing price on Tuesday.
“People are concentrating so much on hedging, they might be overlooking a relief rally,” said Friedman. “We’re up 5 percent on the year, yet it seems like everyone is still waiting to be sold on why we can continue higher.”
This article was provided by Bloomberg News.