Short VIX Bets Looking Smart as Stocks Defy Election Mess

(Bloomberg) -- Traders who bet on calm breaking out in the aftermath of the presidential vote are looking prescient, as Wall Street largely shrugs off a contested election outcome with a divided Congress -- a worst-case scenario.

As it became clear the U.S. election would be close on Wednesday morning, traders who paid historic premiums to insure against stock swings were initially the ones who looked like winners. Within hours, it was those who rushed to short volatility who appeared to come out on top.

With the S&P 500 Index up 2.8% as of 10:58 a.m. New York time, the Cboe Volatility Index had shed around 7 points to 28, its steepest one-day drop since March. The volatility futures curve was sharply lower extending all the way out to July 2021.

It’s a promising scenario for the high number of short-volatility trades that flooded the market in recent days. 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.

Even with “a high chance of the Presidency being contested” under the current outlook, “this uncertainty hasn’t shaken risk as might have been expected,” wrote Jim Reid, a strategist at Deutsche Bank Group AG, in a note.

Markets were 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.