Traders working on the floor of the New York Stock Exchange. (Photo by Reuters)
Options traders are enthusiastically jumping into riskier investments in the U.S. stock market, driven by optimism following the recent election and expectations of Republican dominance in Washington. This surge in trading has boosted the S&P 500 by 3% since the November 5th election, with traders betting on a broad range of assets, including electric carmaker Tesla, small-cap stocks, and regional banks.
Garrett DeSimone, who heads quantitative research at Option Metrics, noted the market is experiencing relief after shedding election uncertainties, propelling almost everything but bonds upward.
Before the election, traders had taken a cautious approach, aiming to protect their investments against potential market swings and uncertainties, like a contested or inconclusive result. Now, with Republicans predicted to control Congress, traders are shifting their strategy, driven by fears of missing out on gains in a rally sparked by Donald Trump’s win and anticipated policy shifts. The expected control by Republicans is seen as a path to economic changes like tax cuts and looser regulations.
Charlie McElligott of Nomura highlighted that investors are rushing to invest as stocks reach record levels. Data from Trade Alert shows that daily call options—bets on rising stock prices—are now outpacing put options by a ratio of 1.5-to-1, higher than the year's average of 1.3-to-1. This indicates a significant shift toward positive sentiment.
Deutsche Bank's data confirms that call options have surged across multiple sectors since the election. Meanwhile, the Cboe Volatility Index, which measures market anxiety, has plummeted to 13.67, its lowest in nearly four months. Michael Thompson from Little Harbour Advisors explained that much of the pre-election worry did not materialize, leading to a drop in the demand for portfolio protection.
Notably, the rally in call options includes major investments in ETFs like iShares Russell 2000 and ARK Innovation, along with options on SPDR S&P Regional Banking and VanEck Semiconductor ETFs. Tesla’s stock options have particularly stood out, accounting for about 30% of all U.S. stock options traded on Monday. This wave of optimism is partly fuelled by the belief that Tesla might benefit from CEO Elon Musk's ties with Trump.
Analysts suggest that this rush into call options has contributed to rising stock prices. According to DeSimone from Option Metrics, when investors heavily buy call options, it signals the market to push stock prices higher.
Despite this upbeat trend, some market participants remain cautious. The potential for fluctuations persists as Trump’s policies evolve. Investors are concerned that proposals like tax cuts or tariffs might fuel inflation. This worry is visible in the recent uptick in Treasury yields, which could hinder stocks if it continues.
On Thursday, stocks fell when Federal Reserve Chairman Jerome Powell indicated no immediate need for rate cuts due to the strong economy. Powell noted that it would take time to assess the full impact of Trump’s economic plans until they are formally enacted. This tempered outlook is also reflected in the S&P 500 skew, which measures interest in bullish calls versus bearish puts. The skew has dropped to 4% from 7% before the election, showing that investors are not entirely complacent and still harbour some caution.
