Following the U.S. election, traders are flocking to riskier bets in the stock market, propelling a rally fueled by diminishing election concerns and the anticipation of a Republican-controlled government next year. The bullish sentiment is widespread, covering everything from electric vehicle maker Tesla to regional banks and small-cap stocks, contributing to a 3% increase in the S&P 500 since the Nov. 5 vote.
Garrett DeSimone, head of quantitative research at OptionMetrics, noted, “We’ve got this relief from this big risk… everything, with the exception of bonds, is going up.” Prior to the election, options traders had adopted defensive strategies, hedging against potential volatility or a contested result. Now, however, many are shifting to a bullish stance, eager to participate in the market rally that followed Donald Trump’s anticipated victory and Republican control of both chambers of Congress. This result is expected to pave the way for Trump’s economic agenda, including tax cuts and deregulation.
The surge in bullish sentiment has been marked by a sharp rise in call options, which profit when stock prices increase. Daily call option volumes now outnumber puts by a 1.5-to-1 ratio, slightly higher than the 1.3-to-1 ratio seen for the rest of the year, according to data from Trade Alert. In particular, single-stock options have seen substantial net call volume growth across most sectors, according to Deutsche Bank. The Cboe Volatility Index (VIX), a key measure of market fear, has also dropped to its lowest level in four months, signaling decreased concerns.
Tesla, in particular, has seen a flood of call options, as investors bet on the company’s future under a Republican government, particularly due to CEO Elon Musk’s ties with Trump. On Nov. 6, Tesla options accounted for roughly 30% of all U.S. stock options traded in notional terms, according to Nomura. This sharp rise in call options may be contributing to the rally in stock prices, as these bets move into the stock itself.
However, the market’s optimism remains cautious. As the specifics of Trump’s economic agenda—such as tax cuts and tariffs—become clearer, concerns about inflation and rising Treasury yields have emerged, potentially limiting the stock market’s growth. Additionally, Federal Reserve Chairman Jerome Powell’s comments this week about the economy’s strength, coupled with the potential impact of Trump’s policies, suggest that the economic effects won’t be clear until new laws or regulations are enacted.
While the rally has been fueled by a shift from worry to speculation, some indicators of investor sentiment suggest a tempered optimism. For instance, the S&P 500 skew, which measures demand for bullish versus bearish options, has fallen to 4% from 7% before the election, showing that while investors are less defensive, they are still cautious. According to DeSimone, “Markets are maintaining some degree of caution rather than displaying complete complacency.”
As the market digests these shifts and investors adjust to the changing political landscape, the full impact of the post-election rally remains uncertain.