Why the VIX Shrugged Off Midterms

There was virtually no bid-up in options prices ahead of Tuesday's midterm elections

by Adam Warner

Published on Nov 6, 2014 at 8:26 AM
Updated on Apr 20, 2015 at 5:10 PM

So, who was the big winner in October? Probably the Chicago Board Options Exchange (CBOE):

In October the average daily volume (ADV) numbers — (1) for S&P 500® (SPX) options rose to all-time record of 1,306,801 in Oct. (up 58% over the previous month), and (2) for VIX options rose to 852,402 (up 53% over previous month).

A recent CBOE press release noted a number of new records in October –

"CBOE's October volume totaled an all-time high for any month - 144.55 million contracts – surpassing the previous record of 144.03 million contacts from August 2011. ADV was a record 6.28 million contracts, a 26-percent increase from October 2013 and a 35-percent increase from September 2014. Index options ADV was a record 2.29 million contracts, a 31-percent increase from October 2013 and a 56-percent increase from September 2014. Index options volume set a new single-day record on October 15, with 4.75 million contracts traded. In S&P 500 Index (SPX) options, October ADV was a record 1.31 million contracts, and on October 15, SPX options set a new daily volume record with 2.69 million contracts traded. …"

Now, some of this was simply trading up and back in volatile and active markets. And, some was betting against volatility, no doubt. But, it's pretty safe to conclude that there was an awful lot of portfolio hedging going on.

It's not all ill-timed bets on volatility and against the market, though. Certainly a lot of traders use puts and CBOE Volatility Index (VIX) calls as ammo to initiate more longs. There was certainly an air of panic, though, so plenty of folks got bearish at the wrong times.

One interesting dynamic that never really became much of a market dynamic was the midterm election. There was virtually no options bid-up associated with it. Granted, it's difficult to isolate that sort of thing, given there are many moving parts that go into options pricing. Objectively, though, SPDR S&P 500 ETF Trust (SPY) options didn't price in much of a gap, as of Tuesday's close.

I think a couple things were in play here. There wasn't all that much uncertainty about the ultimate outcome. Republicans were expected to take the Senate; the only question was by how much, and that's just not going to move markets. It's also debatable that one chamber switching sides will impact markets anyway, given that the executive branch and the House were already split.

If memory serves me correctly, markets do better in split governments. And that didn't change on Tuesday; only the breakdown did. Perhaps it impacts some sectors (energy?), but net-net, it's not likely to change much as far as markets are concerned.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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