Regardless of who wins the Nov. 3 election, some market watchers say, markets are more likely to develop extra turbulent. Economic uncertainty ensuing from the coronavirus pandemic nonetheless looms massive, and the opportunity of a delayed vote depend attributable to a lot of mail-in ballots has additionally unsettled some investors. Moreover, a buildup of positions in big tech-related shares has elevated danger, as seen in a pointy market sell-off on Thursday.
“This is just a situation where all the conditions are ripe for an extraordinary profit” from volatility, mentioned James McDonald, chief govt of Los Angeles-based hedge fund Hercules Investments.
The Cboe Volatility Index has climbed over the past two weeks, first as investors chased additional upside in U.S. shares by way of name choices after which as they sought safety towards a tumble in indexes at file highs. On Thursday, the VIX jumped to its highest degree in practically 10 weeks as the S&P 500 fell 3.5%.
Several investors say that the VIX may climb additional as the election approaches, particularly on condition that sure indicators present a tightening race. In betting markets, Democratic nominee Joe Biden’s lead over President Donald Trump has considerably narrowed, in line with knowledge from RealClearPolitics.
Indeed, second-month futures on the Cboe Volatility Index, which expire in late October, level to expectations for larger market moves across the election interval. The hole between second-month futures and the VIX widened to a file excessive earlier this week.
Recent historical past reveals that election outcomes can have highly effective results on asset costs.
Trump’s largely sudden victory set off violent swings in markets on election night time in 2016, with gold, the Mexican peso and inventory futures among the many property experiencing wild gyrations.
Earlier that 12 months, the British pound plunged to its lowest degree towards the greenback in a long time after the United Kingdom voted to go away the European Union.
This time round, a drawn-out depend of mailed-in ballots may very well be one key catalyst for volatility, mentioned Arnim Holzer, macro and correlation protection strategist at EAB Investment Group.
“Volatility could actually last … for longer because of the nature of the election process itself, no matter who wins,” Holzer mentioned.
McDonald, in the meantime, has purchased December and June name choices on the ProShares Ultra VIX Short-Term Futures ETF, which equally rises alongside volatility.
He mentioned he had already profited from Thursday’s spike in volatility, which despatched UVXY 20% larger to $28.90, and he anticipates that the ETF will rise to $40 earlier than the tip of the 12 months. By actively buying and selling UVXY as it rises, McDonald believes he could make a $1 billion revenue on his $55 million funding. If UVXY have been to stoop beneath $10 near year-end, nevertheless, McDonald would lose his remaining funding within the December calls.
The technique may repay, mentioned Henry Schwartz, head of product intelligence at Cboe Global Markets, however even with election angst, additional volatility spikes aren’t inevitable.
Other investors have added hedges to their portfolios. Matt Thompson, managing accomplice at choices agency Thompson Capital Management in Chicago, holds lengthy positions in each U.S. shares and VIX-linked property such as the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN. He expects the VIX to climb within the weeks shortly earlier than the election, as it did in 2016.
Holding property linked to the VIX for lengthy durations will be money-losing, on condition that the index tends to revert to its long-term common somewhat than rise steadily.
But the latest simultaneous rise of the VIX along with U.S. shares has made such positions worthwhile, Thompson mentioned, and he expects them to carry positive factors as the election approaches.
“Right now, it’s a great scenario for people that are hedging,” he mentioned.