Traders Chase Post-Election Stock Gains in US Options Market

In the aftermath of the U.S. presidential election, traders have been actively pursuing post-election stock gains in the U.S. options market. This shift in sentiment is evident in the increased volume of daily call options, which profit when stocks rise, outnumbering puts by a ratio of 1.5-to-1, compared to 1.3-to-1 during the rest of the year (Trade Alert). The net call volume across single-stock options has also surged across most sector groups (Deutsche Bank). This bullish sentiment is further supported by the Cboe Volatility Index (VIX) sinking to a near four-month low of 13.67, indicating a reduction in demand for portfolio protection. The rapid dissipation of risk premiums after the election suggests that investors are less concerned about election-related volatility and more focused on upside speculation (CBOE, Nomura).

Post-election, the U.S. options market has witnessed a surge in bullish sentiment, with traders piling into call options. The most significant increases were seen in sectors like electric vehicles (Tesla), small-cap stocks, and regional banks (Deutsche Bank). Additionally, there's heightened demand for call options on iShares Russell 2000 ETF (IWM), ARK Innovation ETF (ARKK), SPDR S&P Regional Banking ETF (KRE), and VanEck Semiconductor ETF (SMH), indicating optimism in these sectors (Nomura). This bullishness is driven by relief from election uncertainties and expectations of a Republican lock on power, which could lead to tax cuts and looser regulations.



However, investors remain cautious, with S&P 500 skew at 4%, indicating some degree of market caution. The Trump trade's future may face twists and turns, as details of the Republican policy agenda become clearer. Investors are also wary that parts of Trump's economic platform, such as tax cuts and tariffs, could stoke inflation. Some of those concerns have been reflected in a recent rise in Treasury yields, which could present an obstacle for stocks if it continues. Stocks fell on Thursday after Federal Reserve Chairman Jerome Powell said there was no need for the central bank to rush interest rate cuts given the strong economy.

In conclusion, the post-election bullishness in the U.S. options market, driven by a Republican lock on power, has led to a surge in call options and a decline in volatility. However, this trend may not be sustainable. As the details of the Republican policy agenda become clearer, investors may face challenges such as inflation risks from tax cuts and tariffs, which could stoke inflation and lead to higher Treasury yields, potentially hindering stock market growth. Additionally, the lack of defensive positioning, as evidenced by the fall in S&P 500 skew, could leave markets vulnerable to unexpected events. While the current rally may continue, investors should remain vigilant and maintain a balanced portfolio, combining growth and value stocks, to navigate potential market fluctuations.