By Investors are already taking precautions to safeguard their portfolios against any potential market turbulence stemming from the November U.S. presidential election, according to options-market strategists. With nearly nine months remaining until the election, a surge in demand for S&P 500-linked options expiring in October has caused the price of Cboe Volatility Index (VIX) futures to rise above 20. This occurrence suggests that traders are preparing for significant market swings during the election period.
While the spot VIX remains relatively subdued, the widening spread of 2.8 between September and October VIX futures indicates higher volatility expectations for November. Experts in the derivatives market interpret this as a sign that markets may experience substantial fluctuations in either direction, with volatility typically rising more rapidly when stocks are declining.
Rocky Fishman, the founder of Asym 500, a derivatives-market research firm, explains that the increased range of potential outcomes for the market during that time suggests significant market movements on the horizon. Moreover, call and put options tied to the S&P 500 are commonly used by investors to hedge their portfolios, allowing them to lock in gains or protect against downside risks. It’s important to note that options can also be employed for speculative purposes.
As implied volatility increases, options tend to become more expensive. This phenomenon is observed in the current market situation, where heightened demand for options months prior to the presidential vote reflects a broader trend seen before the previous four elections. Investors have shown an inclination to protect themselves before major political events, with demand for options surging during comparable timeframes.
In conclusion, investors are proactively seeking ways to mitigate potential risks and uncertainties associated with the upcoming U.S. presidential election. By utilizing options tied to the S&P 500, they are actively hedging their portfolios and preparing for a wider range of market outcomes come November.
Election Volatility and Market Uncertainty
As the 2020 election approaches, the financial markets are already feeling the impact of increased volatility. This year, the premiums for volatility are being priced in earlier than usual, mainly due to the certainty surrounding the nominees and the uncertainty surrounding Trump-related policies. Investors are hedging their portfolios by purchasing insurance nearly nine months ahead of the vote, as illustrated in the chart below.
The value of Vix futures, similar to spot Vix, is determined by trading activity in S&P 500 options set to expire the following month. Traders consider the 20-level on the fear gauge, which roughly coincides with the long-term average of the index since its creation in the early 1990s, as significant. Any value above 20 indicates a market that is more volatile than its long-term average.
Comparing the implied volatility priced into the October Vix contract with the relatively subdued level of the spot Vix is also worth noting. As of Friday, the spot Vix stood at 12.9, below 15 for a remarkable 62 consecutive sessions. This streak of low volatility is the longest since a similar 66-day stretch that ended in October 2018, according to Dow Jones Market Data.
On Monday, the Vix climbed to 13.52 as U.S. stocks fluctuated, eventually opening higher. The S&P 500 rose by 0.2% to 5,035.70 points, while the Dow Jones Industrial Average gained 0.3% to reach 38,778 points. The Nasdaq Composite also increased by 0.3% to 16,036 points.
According to Fishman, the demand for hedges so far ahead of the November vote can be attributed to the twin election-related shocks of 2016 – the Brexit vote in the U.K. and former President Donald Trump’s surprising victory over Democrat Hillary Clinton. The high volatility experienced during that period has led markets to proactively price in potential election-related turbulence.
In conclusion, the markets are already experiencing increased volatility in anticipation of the 2020 election. Investors are seeking protection for their portfolios through early insurance purchases, and the value of Vix futures is closely tied to S&P 500 options. With uncertainty surrounding Trump-related policies and the historical significance of the 20-level fear gauge, traders are carefully monitoring market conditions in preparation for potentially turbulent times ahead.
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