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The 2020 U.S. presidential election is projected to be unlike any other in recent history, and the market is responding accordingly.

Historically, expected volatility has climbed higher in the months leading up to Election Day, but in 2020, that expected volatility has been driven significantly higher than in election years past.

Check back here for the latest insights on market reaction to the November 3 election from Cboe™ experts.

Analysis from Inside Volatility Trading
Insights from Cboe’s Kevin Davitt, Options Institute Senior Instructor
October 21, 2020

At the start of 2020, the October VIX futures were the focus as market participants expressed their view of the U.S. election cycle, which was still almost a year away at the time. In the Inside Volatility Trading newsletter, Kevin Davitt, Senior Instructor at Cboe, explains how the term structure has changed as the election grows closer.

“The obvious ‘kink’ in the curve reflected the uncertainty the options market was pricing into November cycle SPX options and the October VIX™ futures contracts, which look forward 30 days from their expiration on October 21, 2020.”
VIX Futures Term Structure 10-21

Read the full Inside Volatility Trading newsletter here.

The Impact on Options
Insights from Cboe’s Henry Schwartz, Head of Product Intelligence
October 20, 2020

The VIX Index isn’t the only metric on the rise this election season. In a recent blog post published on Enterprising Investor, Henry Schwartz, Head of Product Intelligence at Cboe, compared the implied volatilities of interpolated at-the-money SPX options on September 1, 2020, with those of 2016. In the excerpt below, Henry explains how the comparisons show dramatically different expectations.

“In 2016, 90-day options, which included the November 8 election, were trading with 13% implied volatility, about 2 points above the short-term options. Although a slight election ‘bump’ is visible in the data, the 2016 option prices reflected a relatively smooth term structure of implied volatility, which rose to 17% in the two-year expiries. This year, while short-term implied volatility remains elevated near 20%, the uncertainty surrounding the election term is notably higher with implied volatility near 24%. The term structure also displays an extended ‘hump,’ extending another 90 days to the 180-day term, or late February 2021, which suggests a longer period of larger price variations than 2016.”

SPX ATM Implied VolSource: Trade Alert

Read Henry’s full analysis of how the election is impacting options here.

Volatility and the Election in the News
The Latest as of October 19, 2020

Volatility and the Election in the News
The Latest as of October 12, 2020

Vice Presidential Debate Comes and Goes
October 8, 2020
Vice presidential candidates Kamala Harris and Mike Pence debated for the first time this campaign season on October 7. While the debate had many viewers and “fly” memes, the market reaction appeared to be muted as market participants turned attention to the latest job figures.

President Trump’s Tweets Move the Market
October 6, 2020
On the afternoon of October 6, 2020, President Trump shared on Twitter his intent to halt stimulus negotiations until after the November presidential election. Within minutes, the S&P 500 Index dropped more than 40 handles, while October VIX™ futures climbed higher, as illustrated in the chart below.

Later that evening, the President reversed his statement, sharing that he would be willing to sign certain aspects of a stimulus agreement. The market began to recover the following day.

October VIX Futures 10.6 Election Blog

Volatility and the Election in the News
The Latest as of October 5, 2020

Volatility Management Amid COVID-19 News
October 3, 2020
The chart below depicts an increase in demand for tools to manage volatility on August 13, 2020 and October 2, 2020. Notably, on August 12, the U.S. reported its highest number of COVID-19-related deaths in a single day and on October 2, President Trump – who tested positive for COVID-19 the night before – was admitted to Walter Reed National Military Medical Center.

VIX Term Structure on Oct 2 and Aug 13 2

The First Presidential Debate Muddles the Market
September 30, 2020
The first debate of the campaign season did not appear to ease investors’ concerns about uncertainty surrounding the upcoming presidential election. As The New York Times recently reported, investors are eager for a clear outcome immediately following the election, which seems increasingly unlikely. CNN Business reported the contentious first meeting “confirmed investors worst fears,” raising expectations of a drawn-out election and increased uncertainty. And investors’ concerns showed up in the market, Reuters reported. The day following the debate, VIX futures continued to price in that uncertainty, with elevated prices for November and December futures contracts. However, quickly following the debate the market rebounded on the hopes of a potential stimulus package.

Volatility and the Election in the News
The Latest as of September 28, 2020

VIX Futures in Past Election Years
Insights from Cboe’s Matt Moran, Head of Index Insights
September 23, 2020
The current VIX futures term structure is significantly elevated, as of September 23, 2020. The October VIX futures contract, which encompasses Election Day, has surpassed 100,000 in open interest and is settling at a higher level than any other VIX futures on the chart. This elevated interest reflects the strong demand from market participants for protection to hedge against expected volatility around the election.

Why is expected volatility higher this year?
The COVID-19 pandemic, coupled with the recession caused by the pandemic and concerns around the U.S. Postal Service’s ability to deliver ballots, are factoring into expectations that the election will be contentious. Additionally, there is a possibility a winner will not be declared until days or weeks after election day.

By the Numbers
Take a look at the difference between the premium for VIX futures expiring in October and VIX futures expiring in September during the last four election years.

Election Year Bumps

Similarly, the month-end values for VIX Index and VIX Futures show a significant difference between 2012, 2016 and 2020. For example, October VIX Futures in 2012 were priced at 21.20, while October VIX Futures for 2020 are currently at 33.22.

August Month End Values 2012
Month End Values August 2016
Month End Values August 2020

Volatility and the Election in the News
Insights from Cboe Experts

Volatility and the Election in the News
The Latest as of September 21, 2020  

Insights from Vol411
Find daily video analysis of volatility and the election on Medium

Find more Vol411 segments here.