U.S. Election Priced as Worst Event Risk in VIX Futures History
Source: Bloomberg
As the U.S. stock market continues to rally to record highs, the attention of many investors is turning toward Novembers elections as a source of risk.
However, hedging against that potential volatility doesnt come cheap. In fact, its currently the most-expensive event risk on record based on a common way to bet on volatility known as a butterfly trade.
Futures tied to the Cboe Volatility Index expiring in late October closed on Tuesday at 33.5, compared with a spot VIX that closed at 26.1. Those October contracts, which are currently the second-month futures and reflect expected volatility in the month after they expire on Oct. 21, are also higher than the first-month futures expiring in September and the third month expiring in November.
One butterfly trade would be to buy one unit each of the first- and third-month contracts while selling two units of the second. Currently, that trade prices with a reading of -6.9, the difference in costs between the butterflys wings in September and November and the belly in October. That pricing reflects the premium that investors are giving to own volatility over the election. Trading of VIX futures started in 2004.
Read more: https://www.bloomberg.com/news/articles/2020-09-01/u-s-election-priced-as-worst-event-risk-in-vix-futures-history
My financial advisor recommended reducing our proportion of equities to fixed income, in anticipation of post-election market volatility.
beachbumbob
(9,263 posts)not fooled
(5,801 posts)on Fed support of equities and bonds which is a major factor in their "strength" despite the pandemic. Thom Hartmann has said on his show that he thinks it very possible that red don is angling to create a big mess for Biden should he win.
StClone
(11,683 posts)But, leaving a stinking mess is what Rs always have done and Ds have to pick up the pieces. So, why do we need Rs what are they good for? I have never figured that out but the scared, ignorant love'em.
BadGimp
(4,015 posts)Great Name!
not fooled
(5,801 posts)And...Flush the Turd, November Third!
BlueWavePsych
(2,635 posts)If the DOW is red at lunch time, look out below
Pobeka
(4,999 posts)It is now time to protect the gains, and see what happens after the election.
BlueWavePsych
(2,635 posts)I just took a look and I'm at a hair over 1/3 cash, that's far and away the highest I've ever been. I trust my guy, I didn't even hit 11% losses over the spring, but that's not a good omen.