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By April Joyner

NEW YORK (Reuters) – Market volatility is back – and financiers anticipate more wild swings in the coming weeks and months as the U.S. presidential election closes in.

No matter who wins the Nov. 3 election, some market watchers say, markets are most likely to grow more rough. Economic uncertainty arising from the coronavirus pandemic still looms large, and the possibility of a postponed vote count due to a great deal of mail-in tallies has actually also unsettled some financiers. Moreover, an accumulation of positions in big tech-related stocks has increased danger, as seen in a sharp market sell-off on Thursday.

” This is just a situation where all the conditions are ripe for a remarkable earnings” from volatility, said James McDonald, president of Los Angeles-based hedge fund Hercules Investments.

The Cboe Volatility Index <.VIX> has climbed over the last 2 weeks, initially as investors chased further upside in U.S. stocks through call options and then as they sought protection against a tumble in indexes at record highs. On Thursday, the VIX jumped to its highest level in nearly 10 weeks as the S&P 500 <.SPX> fell 3.5%.

Numerous investors say that the VIX could climb further as the election approaches, especially given that specific indicators reveal a tightening up race. In wagering markets, Democratic nominee Joe Biden’s lead over President Donald Trump has significantly narrowed, according to information from RealClearPolitics.

Certainly, second-month futures on the Cboe Volatility Index <.VIX>, which end in late October, indicate expectations for bigger market move the election duration. The gap in between second-month futures and the VIX expanded to a record high earlier this week.

GRAPHIC: Placing for U.S. election volatility – election%20 placing%20 showed%20 in%20 VIX%20 futures%20 curve.png


Recent history shows that election outcomes can have powerful impacts on asset costs.

Trump’s largely unexpected success triggered violent swings in markets on election night in 2016, with gold, the Mexican peso and stock futures amongst the properties experiencing wild revolutions.

Earlier that year, the British pound plunged to its lowest level against the dollar <=USD> in years after the UK voted to leave the European Union.

This time around, a dragged out count of mailed-in tallies might be one key catalyst for volatility, said Arnim Holzer, macro and connection defense strategist at EAB Investment Group.

” Volatility might actually last … for longer due to the fact that of the nature of the election process itself, no matter who wins,” Holzer stated.

McDonald, on the other hand, has actually bought December and June call choices on the ProShares Ultra VIX Short-Term Futures ETF , which similarly increases along with volatility.

He stated he had currently benefited from Thursday’s spike in volatility, which sent out UVXY 20%higher to $2890, and he anticipates that the ETF will increase to $40 before completion of the year. By actively trading UVXY as it increases, McDonald thinks he can make a $1 billion earnings on his $55 million investment. If UVXY were to plunge below $10 close to year-end, however, McDonald would lose his staying investment in the December calls.

The strategy could settle, said Henry Schwartz, head of item intelligence at Cboe Global Markets, however even with election angst, additional volatility spikes are not unavoidable.

Other financiers have added hedges to their portfolios. Matt Thompson, handling partner at options firm Thompson Capital Management in Chicago, holds long positions in both U.S. stocks and VIX-linked possessions such as the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN He expects the VIX to climb up in the weeks shortly before the election, as it did in 2016.

Holding properties connected to the VIX for extended periods can be money-losing, considered that the index tends to go back to its long-lasting average rather than increase gradually.

However the recent simultaneous rise of the VIX together with U.S. stocks has actually made such positions successful, Thompson said, and he expects them to hold gains as the election methods.

” Right now, it’s an excellent situation for people that are hedging,” he said.

( Reporting by April Joyner; modifying by Megan Davies, Ira Iosebashvili and Lisa Shumaker)