Although it is still roughly nine months away, investors are already paying up to protect their portfolios from any market-rattling fallout from the November U.S. presidential election, options-market strategists said.
October futures tied to the Cboe Volatility Index
have recently risen above 20, indicating increased demand for S&P 500-linked options expiring the following month. The election will take place Nov. 5, and is expected to feature a rematch between President Joe Biden and former President Donald Trump.
Although the spot Vix remains notably subdued, the rise in the October Vix futures has caused the spread between the September and October contracts to widen to 2.8, the widest month-over-month spread currently baked in to the Vix futures curve.
Derivatives market experts who spoke with MarketWatch described this as a sign that traders are bracing for wild swings in markets in November. The swings could come in either direction, although volatility typically rises more quickly when stocks are falling.
“Markets are going to be moving around a lot, and it doesn’t have to be down,” said Rocky Fishman, founder of derivatives-market research firm Asym 500. “This tells us that there’s a wider range of outcomes for the market at that point in time, and it could be a wide range in both directions.”
Call and put options tied to the S&P 500 are often used by investors to hedge their portfolios, with investors either locking in gains by selling calls, or protecting their downside by buying puts. To be sure, options can be used for the purpose of speculation as well.
When implied volatility rises, it typically makes options more expensive.
To be sure, increased demand months ahead of the presidential vote isn’t unique to 2024. Demand for options has increased ahead of each of the last four elections, according to Danny Kirsch, head of the options desk at Piper Sandler & Co. Although demand appeared to be picking up earlier this year than during election years past.
“There’s historically a premium for volatility around the election, this year it’s being priced in a little bit earlier, and I think that’s a function of the nominees being known much earlier, and the uncertainty around policy related to Trump,” he said.
As Fishman illustrated in the chart below, investors also lined up to buy portfolio insurance nine months ahead of the 2020 vote.
Just like with the spot Vix, the value of Vix futures is determined by trading activity in S&P 500 options set to expire the following month.
The 20 level is significant for the so-called fear gauge, traders say, because it roughly coincides with the long-term average of the index dating back to its creation in the early 1990s. Above 20, traders are said to be betting on markets being more volatile than their long-term average.
The level of implied volatility being priced into the October Vix contract also looks notable compared to the subdued level of the spot Vix, which stood at 12.9 as of Friday. The index has languished below 15 for 62 straight sessions, the longest streak since a 66-day stretch that ended Oct. 5, 2018, according to Dow Jones Market Data.
The Vix climbed early Monday, rising to 13.52, as U.S. stocks swung into the green after opening lower. The S&P 500
was up 9.14 points, or 0.2%, at 5,035.70, while the Dow Jones Industrial Average
gained 106 points, or 0.3%, at 38,778. The Nasdaq Composite
rose 0.3% to 16,036.
Fishman blamed the legacy of the twin election-related shocks of 2016 — the Brexit vote in the U.K., and former President Donald Trump’s victory over Democrat Hillary Clinton — for driving investors’ demand for hedges so far ahead of the November vote.
“I think it’s in response to all of the volatility we had [around elections] in 2016 that markets started pricing it in,” Fishman said.