Wed. Nov 30th, 2022
Donald Trump and Joe Biden in front of US flag (photomontage). The United States 2020 presidential election is scheduled for November 3, 2020. Photo: AFP

As the US election creeps in, the volatility of the market increases. Investors predict that there would be more ups and downs in the market in the upcoming weeks and might continue to be there for months pre and post-election.

Less than two months remain for the election. The market has been pretty volatile in the past weeks due to the coronavirus pandemic. Many analysts predict that the turbulence in the market is likely to grow in the following months. The results of the coronavirus pandemic can still be found in the market. There might also be a delay in vote count due to the large number of mail-in ballots, which had increased uncertainty of the markets.

James McDonald, chief executive of Los Angeles-based hedge fund Hercules Investments said to business insider, “This is just a situation where all the conditions are ripe for an extraordinary profit.”

History has shown that election results might have a large deal in the markets. In 2016 Trump’s victory in the presidential elections rippled swings in the markets. Gold, the Mexican peso, and stocks experienced ups and downs. Many analysts predict that this year there is a high chance that history from then would be repeated.

During the last few weeks, the Cboe volatility index has been increasing. Cboe volatility is a real-time market index that predicts the market’s expectation of 30-day forward-looking volatility. The index takes inputs from the S&P 500 and tries to predict measurements of market risk and investors’ sentiments. Many refer to the index as “Fear Gauge” or “Fear Index.” VIX jumped to its highest level in nearly 10 weeks as the S&P 500 fell 3.5% on Thursday. This is a result of high uncertainty in the investors.

As the election comes nearer, market analysts say that the VIX might rise higher. This year’s election also sees a close fight between the candidates, which adds to the uncertainty of the market. Data from RealClearPolitics shows that the current president Donald Trump is closing in on his rival Joe Biden’s lead.

Several people also say that the drawn-out count of the mailed-in ballots might be the key catalyst for the volatility. Arnim Holzer, macro and correlation defense strategist in EAB Investissement Group said this to business insider. He added, “Volatility could actually last for long because of the nature of the election process itself, no matter who wins.”

According to reports, McDonald had bought December and June call options on the ProShares Ultra VIX Short-Term Futures ETF. The ProShares Ultra VIX Short-Term Futures ETF rises alongside volatility.

According to him, he had already added profits from Thursday’s volatility. The Thursday’s situation sent UVXY 20% higher to $28.90. According to his prediction, ETF will rise to $40 before the end of the year. McDonald anticipates that he can turn his $ 55 million dollar investment and get a return of $ 1 billion by trading UVXY as it rises. However, if UVXY starts to come down and stoops below $ 10 close to year-end McDonald would lose his remaining investment in the December calls.

Henry Schwartz, head of product intelligence at Cboe Global Markets thinks that the strategy used by McDonald could pay off as told by Reuters. However, although there is an election, further spikes in volatility are not inevitable.

According to Reuters’ report Matt Thompson, managing partner at options firm Thompson Capital Management in Chicago, holds long positions in both U.S. stocks and VIX-linked assets such as the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN. Thompson predicts the VIX to climb up in the following weeks before the election on November 3rd. He also expects to hold on to his gains as election nears. A similar situation happened back in 2016.

Holding VIX assets related to VIX for long periods can also result in money loss. The index tends to revert to its long-term average rather than rise steadily. However, the recent rise of VIX along with US stocks makes these kinds of positions profitable. Thompson added, “Right now, it’s a great scenario for people that are hedging.” (Reuters)

 

By Swastik Bhattacharjee

A student from Kolkata. Currently content creator at The Indian Wire.

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