Dori Levanoni
September 30, 2020

As everyone is well aware, the US will hold a Presidential election this November, which could have a pronounced impact on markets. To develop a forecast of how markets may react, it is helpful to look at what markets are currently pricing in. In this piece, we briefly assess what the options market for the S&P500 Index is revealing about expectations around the election, and conclude that this year does indeed look different – but perhaps not in the way we might expect.

In particular, we look at the implied volatilities of options that expire before and after Election Day (very much along the lines of how/what the CBOE VIX index is created). Below, Figure 01 displays the structure for the current election, as well as the 2004 – 2018 Presidential and midterm elections for context. (We omit the 2008 election, as the Lehman bankruptcy was massively disrupting the option structures around the date studied.)

In Figure 01, the x-axis marks the days before and after the election. Day “0” is shaded grey and represents Election Day. Negative numbers refers to days prior to the election, positive numbers are days after the election. Each “dot” on the line for each year is a measure of the implied volatility derived from all options that expire on that day. For example, for the “2020” line, there is a dot just to the left of the election date (x-axis = -1) and one just to the right of it (x-axis = +1). The dot on the left is based on all the options that expire on November 2, 2020, and the dot on the right is based on all the options that expire on November 4. The volatilities have all been scaled to be “annualized” (regardless of how much time each has to expiration) and “normalized” (so that the value of the measure is set at 1.0 for the first dot) to facilitate comparison.


Sources: CBOE, CRB, Datastream, First Quadrant, L.P.

Based on this graph, the current election is being priced in very differently in implied volatility space. As of this writing, despite all of the known market risks, the options market is positioning for a continued fall in volatility, both prior to and after the election. There is a pronounced “kink” around Election Day itself, with implied volatility briefly rising but again resuming its downward trend. In contrast, for most of the previous elections, implied vol generally increase or stabilize after Election Day. 

It’s hard to draw any definitive conclusions as to why the options market seems to be anticipating a more benign volatility environment. It’s worth noting that current volatility is relatively high from a historical perspective, so markets are in some sense just projecting a reversion to its long-term average. There is also the possibility that markets are forecasting a particular outcome, or simply reacting positively to the expected resolution of uncertainty. The COVID-19 pandemic could also be an intervening influence, with markets possibly expecting further progress toward effective treatment or vaccines. Regardless of why, market expectations surrounding this election are clearly different from the recent past, and perhaps not in the way we might expect.

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© First Quadrant, L.P. 2020. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, L.P. only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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