VIX Hedges Building Fast After Scare-less October

Octobers are supposed to be the scary, and not only because of Halloween. Market observers like to point out how much more volatile October is relative to other months. Not so in 2016 as Goldman notes this was the 4th lowest average VIX since records began. However, the last few days have seen hedgers extremely active ahead of next week’s election (despite one of the lowest levels of S&P 500 realized volatility recorded).

Via Goldman Sachs,

Typical VIX level on election day = 17.6

VIX in-line with past elections but the vol risk premium is high

The VIX closed on Monday October 31 at 17.1, up four points (+31%) over the last week. The VIX has a history back to 1990, which covers six U.S. presidential elections. Exhibit 1 shows the typical VIX level heading into election day and compares that with the recent VIX pattern. The median closing VIX level on election day has been 17.6 back to 1992. By those numbers, an argument could be made that the VIX had been traveling 3-4 points low relative to past election patterns before catching up a bit over the past few days.

A VIX a bit above 17 would place it in-line with its typical level of 17.6 ahead of past elections.

Warning label: it is hard to make a high conviction statement with six data points, especially when two of the periods occurred during the tech bubble in 2000 and the financial crisis in 2008. 

Bottom line: While the VIX is now more in-line with its typical pre-election pattern, the VIX has been rising despite one of the lowest levels of S&P 500 realized volatility recorded for an October. In short, hedging demand has been rising even though the market really hasn’t moved that much.
 

October 2016: One of the lowest volatility Octobers on record at 6.6

October not so scary in 2016 Octobers are supposed to be the scary, and not only because of Halloween. Market observers like to point out how much more volatile October is relative to other months. Not so in 2016.