So we keep hearing that the market is unconcerned with respect to the upcoming election or stated another way the stock market is discounting a victory by Hillary Clinton. I am always skeptical when being told that the market thinks one thing or another without some sort of numbers to back up the statement. With respect to the market discounting a pending event as being a non-event I always turn to volatility. Specifically, implied volatility.
If stock market participants are discounting the election results being a non-event then there should be minimal difference between the implied volatility of options expiring just before and just after the election. With Monday and Wednesday expiring options we have just that. In fact, we have SPX options expiring on eleven days in November.
I got in contact with our partners at CBOE LiveVol and I got the implied volatility for at the money options for each listed expiration date. This means I have access to a consistent IV measure for each SPX expiration and with those numbers I created the chart below.
Not that I needed to, but I highlighted the pre-election and post-election expirations in November on this chart. It goes without saying that SPX options that expire after November 8th are at a premium to SPX options that expire before election day. In fact, I was surprised that the volatility doesn’t drop more after the election results are expected to be known.
CBOE LiveVol does a great job displaying option skew. A chart with all eleven expirations would be a bit much so I narrowed the focus down to the November 7th and November 9th contracts. The chart below shows the active strikes going out 10% in each direction.
As expected the November 9th implied volatilities are higher across the board with the difference even widening out as we move farther out of the money on the downside.
My favorite president always liked to say, “Trust, but verify” when dealing with Russia. When I hear commentary about the market I always like to verify that the numbers back up any statements. We may all “know” how the election is going to turn out, but the option market is still pricing in a little unknown post November 8th.