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Lack of polling volatility puts Trump “out of the money” in US election race, says derivatives hedge fund Capstone

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Capstone Investment Advisors, the global volatility and derivatives-focused hedge fund, believes the lack of volatility both in the US election polls and president Donald Trump’s personal approval ratings suggests Democrat challenger Joe Biden is on course to win the 3 November election.

The firm, which manages USD7.9 billion in assets across a broad range of volatility-focused, derivatives-based strategies, says Trump’s approval rating has been the least volatile of the last 14 US presidents, while polling data suggests 2020’s race is much less volatile than the 2016 battle.

Jason Goldberg, senior portfolio manager at Capstone, says a lack of movement in the polls indicates Trump is “a known quantity”, with most voters appearing to have strong opinion on him which is unlikely to change.

“Three of the biggest inputs into pricing options are proximity of the underlying security to the strike price, time remaining until the option expires, and expected volatility of the underlying security,” Goldberg explained.

He said that current presidential election poll averages favour Biden, putting him “well ahead” of Trump on the path to victory.

“In other words, the Trump option is currently out-of-the-money,” he added.

Having ranged between a low of 35 per cent during 2017 and a 49 per cent high in early 2020 – Trump’s polling range has been roughly half that of Barack Obama.

Trump must now hope for some kind of volatility that will “dramatically shift” his favourability ratings higher.

“There is little evidence that the volatility of the underlying process – in this case, the public’s opinion of President Trump and their voting intention – is high enough to give the option a high likelihood of finishing in-the-money,” said Goldberg.

“While Trump’s personal behaviour has been volatile at times, the polling suggests the presidential race hasn’t been – and that’s a problem when one owns an out-of-the-money option with little time to expiration.”

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