This Chart Shows That Traders Aren't Taking the Possibility of a Trump Presidency Seriously

The option market thinks "Brexit" is a much bigger deal.

Presidential Candidate Donald Trump Holds Nevada Caucus Night Rally

Make event risk great again.

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Donald Trump, Republican presidential nominee.

What was once thought to be a flight of fancy is moving ever closer to becoming reality, with one of the real estate mogul's rivals, Texas Senator Ted Cruz, declaring that Trump may be "unstoppable" if he dominates the upcoming Super Tuesday contests.

Trump's political success is presumably contributing to elevated volatility in financial markets by boosting uncertainty about who will be leading the world's largest economy and strongest military power this time next year due to the extent to which his policies would mark a departure from the norm. The GOP front-runner's positions on immigration and trade, to name two issues, are far from the prevailing status quo.

"We face a real possibility that he secures the Republican nomination, if not the presidency," wrote Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, in a note to clients last week. "According to ElectionBettingOdds.com (which uses prediction markets data from Betfair), Trump is at 70 percent to win the Republican primary and 24 percent to win the general election."

The probability of both outcomes has inched higher since Chintawongvanich's note, as Trump secured high-profile endorsements from New Jersey Governor Chris Christie and Alabama Senator Jeff Sessions while a new CNN/ORC poll shows him enjoying near-majority support among Republican voters nationally.

But Chintawongvanich  also threw cold water on the idea that Donald Trump's ascendance is roiling equity markets.

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The term structure of at-the-money options for the S&P 500 shows the market is pricing in virtually no event premium for the U.S. presidential election, the strategist observed, meaning that the cost of insuring against a move in equities isn't particularly elevated compared with the time before or after the election.

This seemingly sanguine attitude is at odds with what's going on across the pond, Chintawongvanich notes, as the "Brexit" referendum has resulted in a hump in the so-called volatility surface:

Macro Risk Advisors/Bloomberg

"Although a Trump presidency seems like a fairly remote prospect at this point, the situation is reminiscent of the debt ceiling worries in 2012 and 2013," writes the strategist. "Everyone 'knew' the U.S. wasn’t actually going to default, but markets were certainly scared at the last minute."

Seen in this light, the modest correlation between spot levels of the Chicago Board Options Exchange's Volatility Index, the VIX, and news stories mentioning Donald Trump looks more spurious than significant.

Prediction markets suggest the probability of a Trump presidency isn't significantly lower than the odds of the U.K. voting to leave the European Union.

As such, "it seems rather incongruous that almost no event risk is priced into the S&P for 2016 elections," warns Chintawongvanich . "Politics aside, markets would probably greet a Trump victory with a very negative initial reaction."

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