News Digest:

Hedge funds are increasingly embracing binary options amid market turbulence driven by elections, central bank decisions, and geopolitical tensions, according to Bloomberg as reported in Hedgeweek. These high-stakes trades, offering fixed payouts for precise predictions, are gaining traction among institutional investors seeking targeted returns despite the risks.

Unlike retail traders who favor zero-day-to-expiry options, hedge funds are turning to over-the-counter (OTC) binary contracts. These derivatives, designed to hedge extreme market risks across asset classes, have surged in popularity. Although critics compare them to gambling due to their all-or-nothing nature, advocates argue they provide precise risk management within stringent constraints.

Analysts estimate binary contract premiums in 2024 range from hundreds of millions to $1 billion, reflecting growing demand. Major global events this year have highlighted their utility, including elections in the U.S., Europe, and India, live Federal Reserve meetings, an active Bank of Japan, and geopolitical tensions involving Ukraine, Iran, and Israel.

The U.S. presidential election significantly impacted markets. Optimism over Donald Trump’s pro-business policies spurred a rally in U.S. stocks, while concerns over tariffs raised alarms in Europe and China about potential profit declines for multinationals.

“The chase for upside after election uncertainty has driven elevated call skews across U.S. indexes,” said Tanvir Sandhu, chief derivatives strategist at Bloomberg Intelligence. In Europe, tariff risks have fueled interest in hybrid options linked to equity and currency movements.

End Notes

Source: https://www.hedgeweek.com/hedge-funds-embrace-high-stakes-binary-trades-amid-market-uncertainty/