While Nvidia Corp.’s upcoming earnings and Federal Reserve Chairman Kevin Warsh’s speech in Jackson Hole are the main events for investors this week, traders in the equity derivatives markets are already bracing for a potential uptick in volatility around the US midterm elections in November.
Vol traders who keep a careful eye on the futures market tied to the Cboe Volatility Index, or VIX, are pointing to signs of increased demand to hedge swings in the S&P 500 around the time of the elections. VIX futures expiring in September are trading for around 17.4, but jump to 19 for October and 19.7 for November.
“You’ve got the election coming up, you’re starting to get into the window where that matters for VIX,” Matthew Thompson, a co-portfolio manager at Little Harbor Advisors, said in a phone interview. “You can already see that bump in the VIX futures term structure.”
It’s no wonder that traders are bracing for stock-market swings around the election, since political uncertainty in midterm years has historically tended to lead to an increase in volatility.
Since 1945, realized volatility has been higher in midterm years than the previous year 80% of the time, with an average increase of 3.5 vol points, according to a study done by analysts at Cboe Global Markets Inc. In years when one party controls both the White House and Congress, the increase averages 6 points. And S&P 500 performance tends to be lackluster in midterm years, with a mean return of 4% and a median of just 1%, according to Cboe.
This year, the stakes may be even higher than normal given the growing backlash within both political parties against the planned buildout of artificial intelligence data centers, spending plans that have helped power the stock market this year.
And it’s not just about congressional races. At Bank of America Corp., strategists led by Michael Hartnett put a particular focus on the reelection of Texas Governor Greg Abbott. They cautioned that if Democrats gain control of the Senate and Texas governor’s mansion it would trigger a slump of more than 10% in the stock market next year, the standard definition of a correction.
Cboe’s main exchange recently listed daily S&P 500 options that expire on Election Day and the following day, allowing traders and strategists to start monitoring expected election moves. Those options are currently pricing in a about a 1.4% implied one-day move in the S&P 500 on November 4, the day after the election.
“You will start to see more and more election specific trades now that we have that listed,” said Mandy Xu, head of derivatives market intelligence at Cboe.
Adding to the setup is speculation that President Donald Trump and Treasury Secretary Scott Bessent will attempt to keep the stock market purring along ahead of the elections.
“You can assume that Trump and Bessent are going to pump this thing,” said Brent Kochuba, co-founder of data provider SpotGamma, adding that all that is required is a signal from Fed Chairman Warsh that he agrees with efforts by the Treasury Secretary to stabilize the bond market to give investors a risk-on signal. “Don’t fight Bessent and Trump,” he said.
Also, there could be other reasons for the uptick in October VIX futures, including a normal tendency for US stock volatility to pick up in the fall months.
“There is clearly a bump, but there is also a seasonality component to VIX term structure,” said Kochuba.
In any event, despite the bump in the VIX curve, options traders point out that it’s a good time to buy cheap protection against stock-market volatility. The spot VIX ended Monday at 15.8, well below its lifetime average of 19.4.
“Insurance is just very cheap right now,” said Kochuba. “If you have stocks to hedge, this is the time to own options.”
This article was provided by Bloomberg News.