Washington D.C. is setting up for yet another budget battle that threatens to shut down the government and potentially cause the U.S. to default on its debt.
Yet, investors don’t seem to be too worried. The volatility index — a measure of investors’ expectations for big price swings — are near their post-financial crisis lows.
“We estimate that little or no volatility premium for the debt ceiling debates is priced into the options markets on stocks most exposed to government spending cuts,” said Goldman Sachs’ Robert Boroujerdi in a new note to clients.
“Complacency is even more pronounced on stocks with high government exposure,” he added. “Fear priced into options on these stocks dropped over the past few months to new lows vs. SPX options.”
Boroujerdi is specifically talking about companies excluding health care and defence that derive at least 20% of revenue from the government.
“Implied volatility for these stocks is at its lowest level since the financial crisis and has dropped sharply since the start of the year,” he added.
Indeed, Boroujerdi thinks these options, which effectively provide insurance against volatility, are cheap and worth buying.
“Option prices are low following several months of solid US economic data and bullish equity performance,” he added. “Options prices on government exposed stocks rose ahead of the sequester impact in 1Q, but have made new lows in recent weeks. Investors who expect a pullback on debt ceiling debate fears are likely to find puts on these stocks attractive.”
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