stock investors jolted by the volatility spike after the british referendum are overlooking the potential for another shock from the u.s. election, wall street analysts say. <u+201c>brexit was a big wake-up call. investors knew that the likelihood of the leave camp succeeding was greater than zero but they still underestimated the odds and few people hedged ahead of the vote,<u+201d> said randy frederick, director of trading and derivatives at schwab center for financial research. with the u.s. presidential election, <u+201c>there<u+2019>s a little too much complacency. as we approach election, volatility will probably creep up.<u+201d> the options market is indicating a 1.6% swing by the s&p 500 index in the week after the nov. 8 voting day, based on contracts expiring before and after that day, according to bnp paribas sa . the implied move seems humble versus the outsize jump in stock market turbulence after the unexpected outcome of the u.k. vote, <u+00a0>said anand omprakash, the new york-based director of equity & derivative strategy at bnp. the s&p 500 tumbled 5% in two days after the june vote by britons to leave the european union and dropped 2.5% on sept. 9 as hawkish-sounding federal reserve officials compounded worries that central banks wouldn<u+2019>t be as accommodative. the cboe volatility index, or vix, has averaged 14.5 since sept. 9. while that is higher than the multiyear lows reached in the summer, the average is still significantly below the measure<u+2019>s five-year average and could spring back should polls tighten between hillary clinton, the democratic candidate who represents the status quo, and donald trump, a washington outsider. <u+201c>volatility is reasonably priced in light of what happened after the british referendum in june and extremely inexpensive given the political climate,<u+201d> mr. omprakash said. <u+201c>past elections haven<u+2019>t been as consequential as this one with the potential for uncertainty. investors know what they<u+2019>re getting with hillary clinton but there<u+2019>s concern that she won<u+2019>t win.<u+201d> mr. trump trailed mrs. clinton by 4 percentage points in north carolina, and was ahead by 1 point in ohio, according to a wall street journal/nbc news/marist poll released thursday. the s&p 500<u+2019>s lackluster advance this year is further deterring investors from loading up on pricey hedges as they look to lock in returns for 2016. <u+201c>they don<u+2019>t want to spend for premium positioning if they<u+2019>re already in a good spot,<u+201d> mr. omprakash said. bnp recommends a trade that allows investors to be long december volatility. investors should buy puts and calls on the s&p 500 expiring mid-december at strike prices closest to where the gauge is trading<u+2014>a trade known as a straddle<u+2014>while also selling contracts that expire on nov. 11. research firm cornerstone macro said in a note last month that investors can gain cheap exposure to the election by selling nov. 4 calls on exchange-traded funds that track the small-cap russell 2000 index and s&p 500 technology stocks, while simultaneously buying calls that expire one week later<u+2014> a strategy that wagers on an increase in volatility while offsetting the cost of the trade. investors can also bet on upcoming central bank meetings by putting on the inverse version of the trade with etfs tracking utility, energy and consumer-staple companies, cornerstone said. in the last six elections, the vix has always climbed higher in the month leading up to a u.s. election, by an average of 3.5 points, according to credit suisse group ag <u+2019>s mandy xu. adding to risks this year are lofty valuations for u.s. equities and polls showing a potential switch up in the u.s. senate in a month that has seen wilder price swings in the past, said chris rogers of bny mellon wealth management. the s&p 500 is trading at 16.6 times reported profits in the next year, factset data show. <u+201c>historically, october has been a month that<u+2019>s seen more market gyrations,<u+201d> said mr. rogers, the new york-based director of capital markets advisory services at bny. <u+00a0><u+201c>there is a perception of calm out there. that the market move may not be extraordinary but will be a slow melt up.<u+201d> but spikes in volatility have been more dramatic when they occur with central banks artificially suppressing price swings, said bnp<u+2019>s mr. omprakash. that has boosted the popularity of carry trades in which investors sell vix futures or short a volatility etp to profit from the difference in prices between closer-dated contracts and longer-dated ones. <u+201c>a lot of these trades have been done on the back of confidence that central banks will step in when necessary,<u+201d> he said. <u+201c>should central banks surprise negatively, markets could erupt violently<u+201d> as short bets are unwound at the same time as risk-on long positions. investors who see mr. trump winning can buy options on stocks that should outperform if he wins, such as student lenders, for-profit colleges, auto-part retailers and energy companies such as refiners and master-limited partnerships, ms. xu, credit suisse<u+2019>s equity derivatives strategist, wrote in a note this month. alternatively, those who predict a victory by mrs. clinton should buy calls on hospital, medicaid-care, regional-bank and higher-education companies. write to inyoung hwang at ihwang@wsj.com@wsj.com
investors may be misjudging u.s. election volatility  - wsj
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