SPY Could Slump 8% in a Contested Election, Susquehanna Says

(Bloomberg) -- There are hints in the options market that anything but a clear winner in this week’s U.S. presidential election could spell trouble for stocks.

At-the-money straddles on the SPDR S&P 500 ETF Trust (ticker SPY) -- a strategy that entails buying a put and a call option at the same strike price and expiry date -- currently imply a 4.2% move by Friday. Given PredictIt’s 75% odds that a winner will be declared by the end of the week, that suggests SPY could plunge by 8.4% should the results be contested, Susquehanna International Group’s Chris Murphy wrote in a note Monday. That compares with a 2.8% advance on a clear winner.

Volatility markets had been bracing for a too-close-to-call election amid a surge in mail-in voting and President Donald Trump’s reluctance to commit to a peaceful transfer of power. While Democratic nominee Joe Biden’s lead has grown in the polls, a delayed result could be a bigger market-moving event than either candidate’s victory, according to Murphy.

“While there has been debate over whether Biden (more stimulus but higher taxes) or Trump (status quo) will be better for equities in the near term, in general markets appear comfortable with either candidate initially and the removal of election uncertainty could be a positive,” Murphy wrote.

Biden’s chances of securing an Electoral College win climbed to a record high of 90%, according to the latest run of poll aggregator FiveThirtyEight’s election forecasting model. Trump’s chances declined to 9.6%, down from 10.3% on Sunday.

Despite Biden’s lead, Wall Street has warned in recent days that an inconclusive vote poses a “terrifying risk” to markets. Bank of America strategists said last week that U.S. stocks could slide as much as 20% should the result be disputed.

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