The risk of the election has dissipated, and investors are frantically buying risk assets! Is there no obstacle to the rise of U.S. stocks?

According to Zhitong Finance APP, options investors are flocking into the U.S. stock market to make large bets on higher-risk stocks, which has supported the rise of U.S. stocks amid easing election concerns and expectations that the Republican Party will firmly hold power in Congress next year.

The bullish stocks involve a wide range of assets, from electric vehicle manufacturer Tesla (TSLA.US) to small-cap stocks and regional banks. Since the election voting on November 5, these assets have collectively driven the S&P 500 index up by 3%.

Garrett DeSimone, head of quantitative research at OptionMetrics, stated, "We have been liberated from this enormous risk. It is comprehensive... everything is rising except for bonds."

Before the election, options traders took a defensive stance to hedge against potential volatility related to the election, including concerns that the election results might be too close to call or controversial.

Now, many are turning to bullish positions, fearing underperformance against the market. The market rebounded after Trump and the Republicans took control of both houses of Congress, which is a common expectation post-election, and Edison Research's expectation on Wednesday, as this outcome is anticipated to give Republicans more freedom in pushing their economic agenda, including tax cuts and deregulation.

Charlie McElligott, managing director of cross-asset strategy at Nomura Securities, stated in a report earlier this week that investors are "panickingly chasing historically high stocks."

Data from Trade Alert shows that the daily volume of call options to put options is at a ratio of 1.5 to 1, compared to 1.3 to 1 for the rest of this year.

Deutsche Bank data shows that the net bullish trading volume of single-stock options in most sectors has surged significantly post-election.

More broadly, the volatility pattern has changed dramatically, with the Chicago Board Options Exchange Volatility Index (a measure of demand for portfolio protection) falling to a near four-month low of 13.67.

Michael Thompson, co-portfolio manager at small investment firm Little Harbor Advisors, stated, "The market's concerns about volatility have not materialized, so all excess worries have been eliminated by the market."

McElligott pointed out that there has been an increase in demand for a range of call options, including the iShares Russell 2000 Index ETF (IWM.US), ARK Innovation ETF (ARKK.US), Regional Bank Index ETF-SPDR KBW (KRE.US), and Semiconductor Index ETF-VanEck (SMH.US).

The shift in the market from concern to upward speculation can be clearly seen in Tesla's options, as Tesla's stock price soared post-election, with investors buying options, betting that CEO Musk's close relationship with Trump could benefit the electric vehicle manufacturer.

Data from Nomura Securities shows that, in nominal terms, Tesla options accounted for about 30% of the total U.S. stock options trading volume on Monday Analysts say that a large influx of investors buying call options may help drive stock prices up.

DeSimone from OptionMetrics stated, "When you see these investors rushing into call options... this information gets into the stock, and then you see the stock itself rising."

Cautiously Optimistic

Of course, as the timing and implementation details of the Republican policy agenda become clearer, the so-called Trump trade may face setbacks. Investors are also concerned that some of Trump's economic policies, such as tax cuts and tariffs, could trigger inflation.

Some of these concerns are reflected in the recent rise in U.S. Treasury yields, which, if it continues, could pose a barrier to the stock market.

On Thursday, U.S. stocks fell after Federal Reserve Chairman Powell stated that, given the strong economy, there is no need for the central bank to rush into interest rate cuts. He added that the impact of Trump’s policies on economic growth will not be clear until new laws or executive orders are approved or issued.

This may be one reason why some indicators measuring investor enthusiasm are still far from the optimistic levels seen during past market rebounds.

For example, a skew indicator of the S&P 500—which measures the relative demand for buying call options versus selling put options—has dropped from 7% before the election to 4%, indicating a decrease in investors' defensive mindset. However, at different times this year, this indicator was even lower, including in May when it was at 3%.

DeSimone stated, "This indicates that the market is maintaining a certain level of caution rather than being completely complacent."