The U.S. election has concluded, and volatility trading has quickly "cooled down," reigniting enthusiasm for buying U.S. stocks in the options market

According to the Zhitong Finance APP, predictions regarding the decline in stock market volatility following the U.S. presidential election have come faster than expected, with options traders currently preparing for a long-term rise in the stock market.

The outcome of the election is very clear and favorable for risk-taking; the only real surprise is the speed at which capital decisions were made, avoiding days or even weeks of uncertainty. As hedging demand shrinks at the fastest pace since the financial crisis and the upward momentum intensifies, volatility can only decline.

Rocky Fishman, founder of ASYM 500, wrote in a report: "One reason for the sustained implied risk is that the results could be delayed and trigger controversy for a long time. With the presidential election results being clear, this risk has significantly decreased, and the market's response has been to lower implied volatility."

The market generally expects that if there are no dramatic events during the election, volatility will decline as usual before the end of the year. Nevertheless, the speed at which the S&P 500 surged and the volatility index plummeted last Wednesday highlighted the strength of hedging before the event. On that day, the index jumped 2.5%, marking the largest increase since March 2000.

Charlie McElligott, a cross-asset strategist at Nomura Securities, pointed out: "Over-hedged S&P 500 put options are now experiencing significant outflows due to the sharp decline in implied volatility, while 'right-tail' hedged call options are seeing inflows." He added that this has created what is known as a "vanna-tailwind." In this scenario, market makers need to buy more futures to rebalance their accounts.

The decline in volatility is most evident in short-term volatility index contracts. The futures curve has returned to a more normal futures premium, where long-term contracts are priced higher than short-term contracts. This is a sign that the market is moving towards the calm levels seen before the volatility shock in August.

David Lin, founder and CEO of Linvest21, stated: "The reduction in hedging indicates increased investor confidence, and as more investors enter the market, this typically leads to rising stock prices. However, long-term optimism may push stock prices above their intrinsic value, increasing the risk of a correction."

Other market indicators also show signs of calm in the market.

Compilation data shows that the so-called VVIX (the implied volatility of the volatility index VIX) — which declines when there is reduced hedging demand for VIX options — fell sharply from last Tuesday to Thursday, marking the third-fastest decline since before the financial crisis

Prior to this, many investors had bet that the stock market would rebound by the end of the year and that volatility would decrease in the days leading up to the election. They pushed the open contracts for VIX put options to over 5 million, reaching the highest level since August.

The Nations SkewDex index, which tracks the premium of put options used to hedge against stock sell-offs, has fallen to its lowest level since mid-August. This volatility is not limited to the stock market; volatility in bonds and currencies is also retreating.

As put hedging trades are unwound, systematic funds are buying and investors are broadly chasing gains across various stocks, from bank stocks to industrial stocks, with minimal obstacles to short-term increases. However, if a shock occurs that leads to a decline in stock prices, this could also reduce the buffer against sell-offs.

Gareth Ryan, Managing Director of IUR Capital, stated, "Now that these two major market-influencing events have passed, speculative funds could push high-risk asset prices to overbought levels. Being long on the market essentially means investors are shorting volatility. This could have a reverse effect."

The unwinding of hedging trades and expirations, along with FOMO (fear of missing out) chasing gains, can also be seen in the market's options skew, with a surge in bullish demand for major stock indices (especially small-cap stocks) and a decrease in bearish demand. The market believes that under the Trump administration's protection of American manufacturing, smaller companies that focus more on domestic business will perform better.

The sharp drop in volatility in the U.S. has not fully impacted Europe, as investors weigh the potential effects of tariffs. Last Wednesday, the Euro Stoxx 50 index retraced early gains following the election, and the VStoxx index, which measures benchmark volatility, is currently above the U.S. VIX index on both the spot and futures curves.

It is evident that funds are flowing into the United States at a rapid pace. Data from Bank of America shows that approximately $20 billion poured into U.S. equity funds on the day Trump announced his victory. Strategist Michael Hartnett cited data from EPFR Global in a report, stating that this is the highest level in five months. Nomura Securities expects that volatility-controlled funds will purchase $110 billion by January next year.

However, according to Tier 1 Alpha, the frenzy for risk comes with a small warning: "It is important to remember that upward volatility is still volatility, which may have destabilizing effects on many systematic strategies we track."