for the stock market, the next few weeks through election day could look a bit like a fox trot: slow, slow, quick, quick. rarely have investors been so confident of what a presidential election <u+2019>s results will be as they are now. but rarely have the consequences of being wrong been so high. hillary clinton, the status-quo candidate, is meaningfully ahead in the polls . but if donald trump, who is running a highly unconventional campaign and doesn<u+2019>t come from the establishment, won, it could create a highly uncertain situation. put differently, mr. trump is a tail risk<u+2014>something investors don<u+2019>t think will happen, but would matter a lot if it did. there is a tail risk on the other side, too : if democrats are able to capture not just the senate, but the house, mrs. clinton would face few road blocks to enacting her agenda. investors<u+2019> solution: stop trading and take out a little protection. stock-market trading volumes are unusually low. prices of index options (which act as insurance against market swings) expiring right after the election are notably higher than options expiring right before it. it isn<u+2019>t all that different than what investors do in front of other binary events such as federal reserve meetings where the chances of a rate increase are low, says pravit chintawongvanich, head derivatives strategist at macro risk advisors. the difference is that being wrong on an unexpected election outcome could be a lot worse than being wrong on an unexpected rate increase. but when risk events pass, and the unexpected thing doesn<u+2019>t happen, investors can be both relieved and have a lot of catching up to do. the day after election day should be interesting. write to justin lahart at justin.lahart@wsj.com
presidential tail risks tame trading - wsj
justin lahart