A 7% drop in a popular S&P 500 ETF is possible in a contested election scenario based on how options are trading, Susquehanna says

A 7% drop in a popular S&P 500 ETF is possible in a contested election scenario based on how options are trading, Susquehanna says
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  • The popular SPDR S&P 500 ETF Trust — or SPY, which tracks the benchmark index — could drop 7% by the end of this week in a contested election scenario, according to Susquehanna International Group's Chris Murphy.
  • The potential price drop is based on the implied move of an at-the-money options straddle for SPY that expires at the end of the week, Murphy said in a note on Monday.
  • Based on the same implied move analysis, SPY could move 2.8% higher if the election result is decisive and not contested, according to Murphy.
  • "Markets appear comfortable with either candidate initially and the removal of election uncertainty could be a positive," Murphy said.
  • Visit Business Insider's homepage for more stories.

Investors often look to the options market for potential signals as to where the S&P 500 might trade in the future.

Looking at the implied move of an at-the-money options straddle for the SPDR S&P 500 ETF Trust (SPY) that expires this Friday, Susquehanna International Group's Chris Murphy estimated that in the event of a contested election, the underlying S&P 500 could drop 7% by the end of this week.

That's according to a note sent to clients on Monday and an updated analysis shared with Business Insider on Tuesday.
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Traders can calculate a simple implied move analysis for any stock or ETF by adding the price of its weekly at the money put and call option, and dividing that sum by the current stock price.

Read more: From flipping burgers at McDonald's to a self-made multimillionaire: How Willie Mandrell leveraged a simple real-estate investing strategy to acquire 40 units and achieve financial freedom

"If we want to break the election into a positive and negative outcome, we could (OVER) simplify and assume that a clear winner is a positive scenario and a result that is contested past this week is a negative scenario," Murphy prefaced his analysis.
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Utilizing data from PredictIt.org, Murphy assigned a 75% probability of a clear winner of the election, and a 25% probability of a contested outcome.

Assigning those probabilities to the two potential outcomes of a clear winner or contested election, and utilizing the 3.6% implied move for this week in SPY, it ultimately comes out to a potential 2.8% move higher on a clear winner. It also implies a potential 7% decline by the end of this week, in the event of a contested election, according to Murphy. "In general markets appear comfortable with either candidate initially and the removal of election uncertainty could be a positive," Murphy said.
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