Biden Poll Lead Dents Case for Costly Election Volatility Trades

(Bloomberg) -- The possibility of a decisive election victory by Joe Biden and the Democratic Party is chipping away at the cost of hedges against market turbulence surrounding the vote.

The spread between December futures linked to the Cboe Volatility Index and their November counterparts -- a proxy for fears about a contested or delayed result -- has fallen from its early September high. Biden leads by almost 10 percentage points in the latest RealClearPolitics average of polls amid speculation about a Democratic sweep of Congress, a contrast to previous concerns about a tight contest.

For some strategists, market expectations of post-election volatility are still too high.

“The market continues to price a protracted, contested election,” wrote RBC strategist Amy Wu Silverman in a note Thursday. “I find this odd since a landslide or clear victory on Nov. 3 should suck a lot of the volatility out of the heightened December expiry.”

December’s VIX futures traded around 29.3 vols in Asian trading on Friday. That’s higher than contracts priced a month further out in January, which were trading at 29 vols.

Blue Wave

While investors remain on edge after being whipsawed by Trump’s coronavirus diagnosis and shifting views on fresh fiscal stimulus, talk of a Democratic “blue wave” is a counter to the argument that a highly contentious outcome lies ahead.

Volatility in the December-to-January time frame “is likely priced too high,” said UBS Group AG strategist Stuart Kaiser in comments Thursday. For RBC’s Silverman, that means investors have an opportunity to sell “expensive” December volatility to help fund hedges into 2021.

Still, others continue to be wary about the possibility of disputes in states where the results are close, as the Trump campaign continues to raise questions about the legitimacy of mail-in ballots.

While price swings across asset classes are declining, “there is still a risk of delays, recounts, and litigation in more closely contested states,” JPMorgan Chase & Co. strategists Joshua Younger and Henry St John wrote in a note to clients.

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