By Saqib Iqbal Ahmed

Rally in U.S. Stock Market

NEW YORK (Reuters) – Options players are piling into riskier bets across the U.S. stock market, supporting a rally fueled by fading electoral worries and expectations of a Republican lock on power in Washington next year.

Bullish Trends Across Assets

The bullish plays span a wide array of assets, including electric car maker Tesla (NASDAQ:TSLA), small-cap stocks, and regional banks, contributing to the S&P 500's gain of 3% since the November 5 vote.

> "We've got this relief from this big risk," said Garrett DeSimone, head of quantitative research at OptionMetrics. "It's just across the board … you've got everything, with the exception of bonds, going up."

Shift in Options Trading Posture

Before the election, options traders adopted a defensive posture to hedge against potential election-related volatility stemming from a closely contended result. Now, many are shifting to a bullish stance, concerned about missing out on gains following Donald Trump’s anticipated victory and Republican control of Congress, as projected by Edison Research on Wednesday. This shift suggests Republicans may have a freer hand to pursue their economic agenda, including tax cuts and deregulation.

> Investors are "panicking to chase stocks at all time highs," said Charlie McElligott, managing director of cross-asset strategy at Nomura.

Call Options Surge

The volume of daily call options, which profit when stocks rise, has outnumbered puts by a ratio of 1.5-to-1, compared to 1.3-to-1 during the rest of the year, according to Trade Alert data. Net call volume surged across most sector groups post-election, as indicated by Deutsche Bank.

Changing Volatility Landscape

The overall volatility landscape has shifted, with the Cboe Volatility Index – a measure of demand for portfolio protection – dropping to a near four-month low of 13.67.

> "What the volatility market was worried about didn't come to fruition, so all that excess worry came out of the market," noted Michael Thompson from Little Harbor Advisors.

McElligott emphasized increased demand for call options in various sectors, including the iShares Russell 2000 ETF (ARKK), SPDR S&P Regional Banking ETF (KRE), and the VanEck Semiconductor ETF.

Focus on Tesla

Investors rushed into call options for Tesla, with options on the EV maker accounting for approximately 30% of total U.S. stock options traded on Monday, according to Nomura. This influx may be contributing to stock price rallies overall.

> "When you get these investors that pile in to calls … this information moves into the stock and then you see the increase in the stock itself," explained OptionMetrics' DeSimone.

Cautious Optimism Ahead

However, the so-called Trump trade is not without potential complications, particularly as details on the timing and implementation of the Republican policy agenda emerge. Investors are also apprehensive that aspects of Trump’s economic platform, such as tax cuts and tariffs, may lead to rising inflation.

Recent increases in Treasury yields could pose challenges for stocks if they continue, particularly after Federal Reserve Chairman Jerome Powell indicated there’s no need for rapid interest rate cuts due to a robust economy. The impact of Trump's policies on economic growth will not be clear until new laws or administrative actions are taken.

Investor enthusiasm remains cautious, as indicated by a gauge of S&P 500 skew measuring demand for bullish calls versus bearish puts, which has dipped to 4% from 7% before the election. This suggests that while investors are less defensive, they are not entirely complacent.

> "This suggests markets are maintaining some degree of caution rather than displaying complete complacency," DeSimone concluded.