So, what do Mexico and the Biotech industry have in common? They both seem to be braced for excess volatility following the US Presidential election. Before jumping into all that I’ll explain the table that sums all this up.
A couple of days ago I posted a blog showing that SPX option implied volatility jumped about 2 points when comparing at the money options. Our friends at CBOE LiveVol calculates ATM implied volatility for all option markets. Using that information and a little leg work I put together a table comparing IV on Weeklys that expire just before and just after election for various sector ETFs. At the last second I threw the iShares MSCI Mexico Capped ETF (EWW) into the mix since it has been a topic in this election cycle. Since November 18th is a standard expiration date I recorded those numbers as well. Finally, to get a comparison of options expiring before and after the election I calculated the premium (or discount in one case).
The top half of the table compares the implied volatility of Weeklys on the S&P 500, Russell 2000, and Nasdaq-100. When we have pending macro events that could impact the equity market or the market is reacting negatively to news we often see S&P 500 volatility at a relatively high level when comparing it to the other broad based indexes. This sort of behavior shows up with November 11th IV at a 29% premium to November 4th.
The bottom part of the table is a bit more interesting. At the top of the list is the implied volatility on EWW options with a relative November 11th to November 4th premium of 40%. We are aware that Mexico has been a hot button topic in this election cycle. I think standard thinking is a Trump victory would be bad for Mexico and a Clinton victory would be a positive. With this common train of thought I decided to look at the option skew for November 4th and November 11th options. What I found was a bit surprising and appears in the figure below.
Note that the IV for EWW is skewed higher on the downside. I was expecting more of a smile since a Clinton victory may result in a EWW rally. It appears put buying is what is elevating EWW implied volatility and not call purchasing.
Now on to Biotech. Notes that XBI November 11th volatility is at a 25% premium to November 4th. I checked the biggest holdings of XBI and none are scheduled to report between the 4th and the 11th so I do believe we can attribute this to politics. Also, the healthcare sector in the form of XLV volatility is relatively high as well. Since I checked skew for EWW I did the same for XBI and found that the slope moves up on the put side as well. Looks like the risk expectation is to the downside for this sector as well.
We can be told what to expect once we finally get this embarrassment of an election behind us, however I like to consult the numbers. The numbers are saying the option market is focused on Mexico and the US Healthcare sector. As we get closer to election day we will see if there’s any change and report back here.