With the markets seeming rather calm, trading within a range bound level belies potential volatility of the U.S. presidential election season. Consequently, investors may consider strategies like exchange traded funds that track the CBOE Volatility Index to hedge the upcoming risks.
Citigroup Inc. Head FX Strategist Steven Englander argued that while investors expect a degree of volatility around election day, people aren’t adequately hedging around the event, Bloomberg reports.
For instance, the CBOE Volatility Index, or so-called VIX, is hovering around the 13.3 level, or below its historical average range of between 15 to 20. The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index.
“Investors will be surprised at how fast and far asset markets move on the news of a Trump or Clinton victory, and how little chance they have to profit from the news,” Englander told Bloomberg.
Englander attributes the current complacent attitudes to investors’ reluctance to “pay a premium in a year when returns are modest.” Consequently, investors’ complacency could set up markets for a volatile sell-off in the wake of a risk even, such as the U.S. election, when everyone reacts at once.
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“If everyone is positioning to pull the trigger on positioning as soon as they know the outcome, the repressed volatility may emerge in a very sharp burst,” Englander added. “The outcome would likely be that prices move much more quickly than expected with much less opportunity to get the position on than investors would like and some possibility that one-way markets lead to overshooting.”