Typical VIX level on election day: 17.6
The VIX has a history back to 1990, which covers six U.S. presidential elections. The median closing VIX level on election day has been 17.6. With
exactly one week to go prior to the U.S. presidential election, how is the VIX trading relative to its typical pre-election pattern? After a four point rise
over the last week, the VIX closed out October at 17.1 and now stands just below its typical election-day level. The VIX has been rising despite one of
the lowest levels of S&P 500 realized volatility recorded for an October.
Isn’t October supposed to be scary? October 2016 was one of the lowest volatility Octobers on record at 6.6.
Two pieces of post-Halloween vol candy:
- S&P 500 realized volatility during the calendar month of October was 6.6, the lowest for an October in 23 years (1993).
- The average VIX level of 14.6 in October ranked as the 4th lowest for the calendar month of October back to 1990.
The fact that investors are purchasing broad based macro hedges ahead of the election, even though the market isn’t moving, is causing a large spread between implied volatility (the market price of option hedges) and realized volatility (how much the market is actually moving).
VIX – S&P 500 1m realized volatility spread is elevated
S&P 500 10-day and 1m trailing realized volatility measures stood at 5.4 and 6.6 as of the end of October. That puts the VIX versus 1m realized volatility spread at 10.5 vol points (17.1 vs. 6.6). That is a 95th percentile ranking back to 1990 and 2.6x higher than the average spread of 4.1 points back to 1990.
The dislocation may close quickly post election
The wide dislocation between the VIX and realized volatility could result in a quick drop in the VIX and a rise in the S&P 500 post election if election uncertainty declines, as we expect.