By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Options players are piling into riskier bets on the U.S. stock market, supporting a rally that has come on the back of easing election concerns and expectations of a Republican grip on power in Washington. next year.
Bullish bets span a wide range of assets, from electric car maker Tesla to small-cap stocks and regional banks. Together, they have helped fuel the S&P 500’s 3% gain since the Nov. 5 vote.
“We have this relief from this huge risk,” said Garrett DeSimone, head of quantitative research at OptionMetrics. “It’s across the board…everything except bonds is going up.”
Options traders took a defensive stance ahead of the election to protect their portfolios from potential election-related volatility, including concerns about an outcome that could be too close to call immediately or be contested.
Many are now taking a bullish stance, fearful of underperforming a market that has recovered following Donald Trump’s victory and Republican control of both houses of Congress, something that had been anticipated after the election and was projected by Edison Research on Wednesday. The outcome is expected to give Republicans more freedom to pursue their economic agenda, which includes tax cuts and looser regulations.
Investors are “panicking to chase stocks at all-time highs,” Charlie McElligott, managing director of cross-asset strategy at Nomura, said in a note earlier this week.
The volume of daily calls, which benefit when stocks rise, has outpaced puts by a ratio of 1.5 to 1, compared with 1.3 to 1 during the rest of the year, data showed. from Trade Alert.
Net stock option volume rose sharply across most sector groups after the election, according to Deutsche Bank.
More broadly, the volatility picture has changed dramatically, with the Cboe Volatility Index – a measure of demand for portfolio protection – sinking to a near four-month low of 13.67.
“What the market was worried about was volatility didn’t come true, so all that excess worry came out of the market,” said Michael Thompson, co-portfolio manager at investment firm Little Harbor Advisors.
McElligott cited increased demand for call options on a variety of names, including options on the iShares Russell 2000 ETF ARK Innovation ETF, SPDR S&P Regional Banking ETF and VanEck Semiconductor ETF.
The shift from concern to bullish speculation was visible in options on Tesla, with investors flocking to buy options as shares soared after the election on bets that CEO Elon Musk’s close ties to Trump could benefit the electric vehicle manufacturer.