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As post-vote disputes look more likely, S&P 500 futures swung violently between gains and losses in early London trading. The Cboe Volatility Index stayed well above its historic average at around 35 while the volatility futures curve remained firmly elevated.
It all looks potentially troubling for the high number of short-volatility trades that flooded the market in recent days, though it’s too early to judge their outcome. The put/call ratio of the VIX spiked to the highest in more than a decade in October, showing a slew of bets on the fear gauge to fall.
“Delays and/or lack of a clear result prolongs uncertainty, and raises the possibility the result will be legally disputed,” Barclays (LON:BARC) strategists led by Emmanuel Cau wrote in a note on Wednesday. “Volatility is thus likely to remain elevated.”
Markets are braced for choppy trading. President Donald Trump falsely declared early Wednesday he had won re-election against Joe Biden and said he would ask the Supreme Court to intervene, even as several battleground states continued to count votes.
In their “too close to call“ scenario spelled out several weeks ago, Barclays strategists led by Maneesh Deshpande wrote: “Volatility would stay elevated and VIX futures would likely remain in backwardation,” referring to a downwardly sloping shape that’s a sign of heightened near-term anxiety.
Wall Street’s fear gauge has been famously jumpy for months in advance of the vote, as traders piled into hedges ahead of one of the most anticipated event risks in decades. While some of the high cost of options was attributable to call option demand, it’s also a sign that investors were prepared coming into Tuesday’s contest.
By one account, the volatility risk premium for the S&P 500 was near the highest level in the past decade on the Friday before the vote.
“The level of the VIX and the high sustained level of implied to realized volatility for several months indicates that the market rally since March was not just blindly complacent,“ Tallbacken Capital’s Michael Purves wrote in a note.
©2020 Bloomberg L.P.
