Barclays Sees VIX Plunging to Pre-Covid Level in Clear Biden Win
Wall Street’s fear gauge is poised to tumble to pre-pandemic levels if Joe Biden wins, Barclays says.
(Bloomberg) -- Wall Street’s fear gauge is poised to tumble to pre-pandemic levels in the aftermath of a clear-cut election victory for Joe Biden even if U.S. stocks decline in its wake, according to Barclays Plc.
In projections more aggressive than the futures market is pricing in, the Cboe Volatility Index will likely drop to “at least” 20 if a win for the Democratic contender is confirmed shortly after the Nov. 3 vote, the bank told clients this week.
While stock traders have turned bullish on the growing likelihood of a Blue Wave, markets remain on high alert for prolonged post-election uncertainty. The November VIX future, which expires two weeks after the vote, is trading at 29, around current levels of the spot index. A level of 30 implies the S&P 500 Index will move around 9% over the next 30 days, according to analytics service SpotGamma.
“It is important to note that SPX does not have to rally significantly and in fact could even decline; even then, VIX could potentially drop,” strategists led by Maneesh Deshpande wrote in a note.
Even as the S&P 500 Index surged 55% from its March low, traders have sent the cost of protection soaring in one of the most anticipated event risks in decades. Now, fear of a contested election is easing. While the VIX futures curve remains elevated, it’s dropped across the board compared with a month ago. A series of volatility trades that bet on post-election calm have recently lit up the options market too.
Yet for all that, the fear gauge has remained stuck at around 30 for months. Through Tuesday, it had risen for seven sessions in a row, its longest streak since the run-up to the 2016 presidential election.
While demand to hedge election risk and the resurgent virus are pushing the VIX up, it’s also arguably been whipped around by retail investors gorging on call options.
While shorting the November and December VIX futures would be one way to bet on lower post-election volatility, Barclays strategists recommend positioning for a decisive Biden victory through bearish options on the fear gauge. Traders have recently bought put spreads for instance, which can cut costs but also limit gains.
“While it is tempting to decrease the cost using put-spreads or put-ratios, we think it would not be prudent to cut off the tail of a substantial decline in VIX, and hence prefer outright VIX puts,” they wrote.
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