The presidential election temporarily fades out of investors' sight, with the options market recently focusing on the Fed rate cut

Zhitong Finance APP noticed that the fiercely competitive presidential election has gradually faded from the market's attention, with investors focusing on the Federal Reserve meeting on September 18. Any policy mistakes could disrupt the already tense market due to signs of slowing economic growth.

Rocky Fishman, founder of derivatives analysis company Asym 500, said, "The market's recent main focus may be on the Federal Reserve and the start of the rate-cutting cycle. Although the risk pricing of stock options around election day is high, the actual trading volume of election-related bonds is limited."

Traders are also waiting for the debate between the two presidential candidates, Harris and Trump, on Tuesday before determining who will win the election. Investors will analyze the candidates' positions on issues such as tariffs, immigration policies, and corporate taxes.

At a time when the Federal Reserve has just begun to hint at rate cuts, raising tariffs and strengthening trade restrictions could push up inflation. Meanwhile, Goldman Sachs strategists stated that Harris's proposal to raise the corporate tax rate from 21% to 28% could reduce the earnings of S&P 500 index component companies by about 5%.

Stocks

The contract of the widely watched fear index, the Chicago Board Options Exchange Volatility Index (VIX), appears milder than four years ago. The "twist" in the VIX forward curve has weakened, with the premium of October futures (measuring the volatility of November S&P 500 index options) relative to September and November contracts much lower than in 2020 or 2016.

Premium for October has decreased compared to September

Steve Sosnick, Chief Strategist at Interactive Brokers, said, "Apart from continued buying of October VIX futures, we haven't seen too many specific positions before the election. The open interest is not particularly large, which means that the price increase is largely defensive rather than a huge demand for protection."

However, Garrett DeSimone, Director of Quantitative Research at OptionMetrics, stated that the implied trend of the S&P 500 index for the election has been rising, especially since early August, reaching over 1.5% last week.

Stuart Kaiser, head of Citigroup's global market US stock trading strategy, wrote in a report: "The election result is likely to be a 50/50 outcome, so we will focus on holding volatility rather than directional views." "Implied volatility tends to rise as the election day approaches. If volatility eases in the next month, we will take the opportunity to buy options or trade calendar spreads to reduce costs."

Currency

Foreign exchange options traders also appear optimistic - they are preparing for a closely contested election, while implying that if Trump wins, the risk of trade impact will increase.

To measure the election risk premium in the currency market, traders can now look at the difference between the three-month implied volatility (capturing the voting day on November 5) and the one-month term (not yet captured) for a given exchange rate.

The Euro and the Renminbi are the currencies most likely to be affected by tariffs in the Trump 2.0 era. However, the difference between the three-month and one-month volatility of the Euro and offshore Renminbi remains within normal ranges.

For the Renminbi, this spread is currently around 80 basis points, lower than the level in July. The Euro is currently around 45 basis points, also within the range since mid-2023. Taking the Renminbi as an example, its trend is similar to the election cycles of 2020 and 2016.

As the election date approaches, and more campaign activities, interviews, and presidential debates force each candidate's views to be made public, this situation may change. The one-month implied volatility index is likely to see a sharp rise in early October, as in 2016 and 2020.

Cryptocurrency

John Divine, head of over-the-counter trading at BlockFills, a digital asset trading and technology company, said that Bitcoin's outlook in the short term is unusually dim.

"The current bets are bearish until October 25, slightly bullish before the election," he said. "As we look towards November, we start to see the buying price of bullish options higher than bearish options, but the reality is different, which is quite surprising to me. This indicates how much fear there is in the market right now."

Recent Bitcoin trends lean towards bearish.

Divine stated that while Trump is generally more favored by the cryptocurrency market, the boundaries of who supports cryptocurrencies are becoming increasingly blurred "I don't think the market is fully focused on who will win in November," he said. "More importantly, they are using this story to drive a narrative that aligns with the current position, which is bearish."