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Regardless of who wins today’s elections, options traders are the winners this year.
Some 583.7 million calls and puts traded in the U.S. last month, according to TradeStation data. It was a new record for the options market, inching past the volatility-fueled surge in March by 5.3 million contracts. October’s total was also 48 percent above the same period last year.
Why are options volumes surging? The pandemic is one reason because it’s increased volatility in the stock market. The rise of technology stocks like Apple (AAPL), Tesla (TSLA) and Facebook (FB) are the other reason because they’re more popular with options traders than other sectors like industrials and health care.
Today’s presidential and congressional elections are also huge for options traders because of all the uncertainty. Investors aren’t just worried about whether Donald Trump or Joe Biden will have better policies for the stock market. They’re also focused on the ability to collaborate with Congress on a stimulus bill to keep the economy afloat as coronavirus cases rise. Another concern is the potential for an unclear or contested outcome.
Options are derivatives based on stocks and exchange-traded funds. Call options fix the price where investors can buy, so they usually appreciate when stocks and ETFs rally. Puts are just the opposite because they lock in a selling price. Puts can gain value when markets fall.
How can you use options? Traders worried about a selloff in an index like the S&P 500 or Nasdaq-100 can buy puts in the SPDR S&P 500 ETF (SPY) or Invesco QQQ Trust (QQQ). They might also consider vertical spreads, which can lower cost and increase leverage.
Alternately, investors might see the potential for a big rally if confidence returns after the election. If they want to profit from a rally without risking a lot of their capital, they could purchase calls or call spreads. That would provide some upside exposure with limited risk.
Regardless of where the market goes after the election, options activity has been huge lately. Total volume for the year blew past 2018’s record back in September (less than three-quarters of the way through), according to Options Clearing Corp. Today’s election, and subsequent moves will only add to that historic total.
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