Options on the S&P 500 pointed to a 2.8% move on Nov. 4, the day after the presidential vote, down from an implied 3.2% swing seen in August, according to the bank’s analysis.
What’s also shifting is the curve in futures tied to the CBOE Volatility Index. Specifically, VIX’s November contracts, which refer to volatility during the month through Dec. 18, have jumped above October ones for the first time this year, a sign that traders are adding protections well beyond Election Day, said Goldman strategists led by Ben Snider.
“Option markets seem to have abandoned the view that volatility would rise strongly in the lead-up to the election, which had been priced in throughout much of 2020,” the strategists wrote in a note to clients. “Instead, currently markets are expecting volatility to jump at Election Day, and then remain high thereafter.”
The focus on extended volatility may mark a change in sentiment toward election risks. In early August, Binky Chadha, chief global strategist at Deutsche Bank, warned that options traders were too sanguine positioning for a steep post-election drop in the VIX.
The latest shift in volatility pricing reflects the potential for delays in counting ballots and for results to be disputed, according to Goldman. A key date during the process is Dec. 8, known as a “safe harbor” deadline for when states have to resolve any controversies related to the appointment of their electors to the Electoral College, and six days before electors cast final votes on Dec. 14 to determine the outcome.
In 2000, the contested George Bush-Al Gore election results were decided on Dec. 12 after the Supreme Court ended a Florida vote recount ahead of the Electoral deadline. Republicans have floated a bill that seeks to extend the safe harbor and Electoral College meeting into January.
“The level of implied volatility sends a clear message: The election matters for equities, and the outcome is highly uncertain,” Snider said.
One industry — health care — appears particularly shielded from the turmoil. With developments in the race for Covid-19 vaccines at the top of investor’s minds, health care appears to be more buffered against broader market volatility than any other sector, save industrials, according to Goldman.
October VIX futures, which expire before Election Day but are priced off options that include Election Day, have less upside than the November future, they wrote, adding that November VIX optionality should be more valuable than October VIX options and recommends trades in VIX option calendars.
This is how Goldman suggests investors brace for the turmoil:
- Sell VIX Oct. $27 puts and buy Nov. $27 puts for $1.05 per contract versus reference prices of the Oct. future of $30.40 and the Nov. future of $30.80
- For investors wanting to hedge, they recommend selling VIX Oct. $35 calls and buying Nov. $35 calls for $1.25 per contract
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