Option 2020. Option Traders and the Presidential Election | CFA Institute Enterprising Investor
As individuals, governments, and industries cope with the direct and indirect effects of COVID, global securities markets are bracing for a high-stakes US presidential election that could differ dramatically from its recent predecessors. What can investors, asset managers, and traders reeling from the unprecedented volatility of February and March expect heading into the final months of ?
Indexes offer an efficient way to gauge the market, and listed index-based derivatives can provide a foundation for analysis in the form of market prices, implied volatility, open positions, and option flow sentiment.
Broad-based index options are typically used by portfolio managers and traders for precise adjustments of risk and exposure.
Market-makers and liquidity providers play a crucial role in the process, risking capital and adjusting prices in response to supply, demand, and expectations of future market behavior.
The unique features of SPX options, option 2020 with the fundamental characteristics of listed options, yield valuable insight into expectations and positioning ahead of significant events like the US presidential election.
Prices and Volatility In theory, accurate valuation of options is a function of the underlying price, time to expiration, strike, interest rates, dividends, and volatility. While all inputs are subject to some degree of uncertainty, volatility receives the most attention in practice because a severe mis-estimation of volatility can result in unexpected trading outcomes.
Forex Trading - a profitable investment option in 01 Jan Of the various investment and trading options available to you, the one option we focus least on is currencies trading or forex trading. For a long time, currency trading was out of bounds for most retail investors. With the introduction of currency futures and later currency options, you can actually and effectively take positions in the future movement of currencies. As Indian markets enterthe markets are more globalised than ever before in history. Hence, currency fluctuations are not only a risk but also a unique opportunity.
When looking at option prices, the midmarket level of implied volatility at any given time indicates the market expectation of the magnitude of daily returns over the duration of the option. Implied volatilities of interpolated at-the-money SPX options on 1 September and 1 September show dramatically different expectations. As positions are opened and option 2020 over time, the open interest changes, providing transparency into the holdings of market participants.
Open interest can be viewed at the underlying, term, and strike levels. Compared toSPX open interest is significantly higher in the January and March terms, consistent with positioning for a volatile period extending well into Order Flow Option order flow can give another view on market dynamics. At the basic level, order flow analysis contextualizes trading activity to option 2020 if the buyer or seller initiated the trade, based on techniques such as side-of-market modeling, comparison of trade price to theoretical value, and price and implied volatility impact.
With added analysis to interpret multi-leg trades and algorithmic executions, order flow analysis helps identify the focus and expectations of market participants for periods of interest.
SPX order flow in post-election contracts over the past three months is dominated by December puts, which is not unusual given the popularity of the product for hedging portfolios.
While accurate prediction of market behavior remains elusive, index options provide a data-driven window into the collective expectations of traders, portfolio managers, and investors.
Based on the 1 September data, traders expect volatility to increase as 3 November approaches followed by a sustained period of volatility higher than that seen for most of the past decade.
While the preponderance of downside strikes is not unusual, the notional value associated with positions expiring after the election is significantly larger than the previous cycle.
This reflects a combination of year-end hedges and longer-term positions intended to protect portfolios and reflect the views of managers. All posts are the opinion of the author.