Debt Ceiling Woes Swamp U.S. Stock Options Market

Worries over a debt ceiling showdown are creeping into US options markets, as investors grow increasingly concerned that lawmakers will be unable to hammer out a deal in coming weeks, potentially sparking stock volatility as a key deadline nears, Saqib Iqbal Ahmed wrote in an analysis for Reuters.

Photo Insert: Worries are bubbling in the options market as some analysts warn the so-called X-date, after which the government is no longer able to pay all its bills, could come in the first half of June.

Although concerns related to raising the $31.4 trillion US debt ceiling have been apparent in Treasury markets for a while, equities markets have been less fazed, with the S&P 500 doggedly holding onto a rally that has seen it gain 6% year-to-date.

In the options market, however, worries are bubbling as some analysts warn the so-called X-date, after which the government is no longer able to pay all its bills, could come in the first half of June.

While most investors still expect lawmakers will avoid a market-churning 2011-style standoff, some are now hedging against the volatility that could result if negotiations come down to the wire or fail, sparking what Deutsche Bank analysts said could potentially be "the defining market event of the summer."

Alex Kosoglyadov, managing director of equity derivatives at Nomura, said “it’s something that is definitely getting increasing attention."

Elevated concern can be seen in one measure of S&P 500 skew - a gauge of relative demand for put versus call options - that has jumped to a one-year high, driven in part by some large trades that would pay out if equity volatility spiked in coming months, Kosoglyadov said.

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