This article aims to highlight the trends driving implied volatility levels during U.S. election periods. Our analysis reveals that the VIX Index typically follows an upward trajectory approximately six months prior to Election Day and tends to decline rapidly in the following days, once option hedges unwind. We setup a short VIX futures strategy that capitalizes on this mean-reversion trend, using Z-scores and backwardation in futures curve as trigger indicators. We backtest the strategy across the election years 2012, 2016, 2020 and 2024, achieving strategy returns of 5% in 2012, of 32.1% in 2016, of 27.5% in 2020 and of 70.7% in 2024. We relate the performance of the strategy to the tightness of the election race for each year and we examine the risks associated with the implementation of the strategy. We conclude that the strategy proves to be more profitable when polling prior to the election indicates greater uncertainty regarding the outcome. The strategy carries some significant risks, such as potential pricing errors, disruptions from exogenous mean reversion, and leverage-related risks
VIX and U.S. Elections: A Historical Analysis of Volatility Trends
The CBOE Volatility Index (VIX), often called the "fear gauge", measures market's expectations for implied volatility on the S&P500 over the coming 30 days. Analyzing the historical behavior of the VIX around U.S. presidential elections reveals valuable patterns, highlighting the dynamics of market uncertainty and investor sentiment during these critical periods. Historically, the VIX remains below 20 for much of the year but consistently follows an upward trajectory approximately six months before Election Day. This rise, typically seen since 1992, is attributed to the heightened uncertainty surrounding potential policy shifts and election outcomes, and is often driven by options traders adding hedges, especially through S&P 500 put options, which directly influence the VIX. The average peak for the VIX has been around 27 six months before Election Day.
Following Election Day, the VIX generally experiences a rapid decline as markets digest the results and option traders unwind hedges. This phenomenon, known as a "volatility crush," is similar to the market behavior after quarterly earnings releases. On average, the VIX stabilizes within 30 days post-election and returns to normal levels within 60 days.
The CBOE Volatility Index (VIX), often called the "fear gauge", measures market's expectations for implied volatility on the S&P500 over the coming 30 days. Analyzing the historical behavior of the VIX around U.S. presidential elections reveals valuable patterns, highlighting the dynamics of market uncertainty and investor sentiment during these critical periods. Historically, the VIX remains below 20 for much of the year but consistently follows an upward trajectory approximately six months before Election Day. This rise, typically seen since 1992, is attributed to the heightened uncertainty surrounding potential policy shifts and election outcomes, and is often driven by options traders adding hedges, especially through S&P 500 put options, which directly influence the VIX. The average peak for the VIX has been around 27 six months before Election Day.
Following Election Day, the VIX generally experiences a rapid decline as markets digest the results and option traders unwind hedges. This phenomenon, known as a "volatility crush," is similar to the market behavior after quarterly earnings releases. On average, the VIX stabilizes within 30 days post-election and returns to normal levels within 60 days.
The S&P 500’s post-election performance, combined with the VIX Index, also offers valuable insights into how elections shape market volatility. Historically, election years show a clear link between political outcomes, policy expectations, and market sentiment. In 2008, despite the financial crisis, the S&P 500 rose by 24% in the 12 months following President Obama's election, driven by fiscal stimulus and stabilization efforts. This rise is closely tied to reduced VIX levels as fiscal stimulus eased market fears. During Obama’s second term in 2012, the S&P 500 returned 12.18%, though the market later experienced negative returns from May 2015 to May 2016. After President Trump's victory at the 2016 elections, the S&P 500 increased by 21% in the following year, buoyed by expectations of corporate tax cuts and deregulation. During the 2020 elections, despite the COVID-19 pandemic, the S&P 500 saw a 16.3% rise in the year following President Biden’s election. Here, the VIX initially spiked, reflecting uncertainty, but fell as the S&P 500 gained after Biden’s win, supported by vaccine rollouts and government spending.
Current Election Volatility and Strategic Implications
Heading into the 2024 election, implied volatility has been elevated, reflecting the close race between Donald Trump and Kamala Harris, and uncertainty surrounding potential policy impacts. Prior to the Election Day, assets seen as indicators of support for the former president Trump showed significant volatility. Trump Media & Technology Group (DJT.O) rose by as much as 18.64% and fell by as much as 8.42%, with trading halted multiple times due to volatility. Companies in the oil and gas industry, such as ExxonMobil and Chevron, experienced gains due to market anticipation of policies favoring increased domestic production under a Trump presidency. Meanwhile, cryptocurrency stocks followed Bitcoin's upward trend, with cryptocurrency gaining approximately 4%, reflecting Trump's alignment with the sector as an advocate. Overall, the many “Trump bets” placed by the market prior to the Election Day contributed to steer high implied volatility levels.
In the 2024 Elections, the VIX has moved above its 200-day moving average, a pattern consistent with previous election cycles. The stock market’s volatility gauge was rising the day before U.S. Election Day in the light of a close election. The VIX, was up almost 3% on Monday morning, November 4th, ahead of the stock market's opening bell, at around 22.5, according to FactSet data, at last check. Since 1990, the median VIX level on the day before Election Day has been 18.4. However, this year, the VIX reached the fourth highest level among the nine Presidential Election years during this period.
Following Election Day, the VIX index dropped by approximately five basis points as the election outcome became clear quickly, easing market concerns about prolonged election uncertainty. The VIX traded around 15.9, down from an intraday peak of 23.42 the week before elections, positioning the index for its lowest close since late September.
The outlook following the U.S. 2024 elections suggests we are in an environment where a wide range of outcomes is still possible. While the clear election result has alleviated some immediate uncertainty, it has also sparked concerns about future U.S. policy directions. Our outlook takes place against the backdrop of a momentous U.S. election, with markets welcoming the decisive result that took some near-term uncertainty off the table, although medium-term policy uncertainty remains.
Traders who paid premiums for protection via SPX puts found that, during these elections, prices of those options declined rapidly once uncertainty abated. This type of "volatility crush" is similar to the behavior often seen in the implied volatility of stock options before and after quarterly earnings reports. The key takeaway is that some traders consider "buying volatility" ahead of major events but may trim or remove their hedges just before Election Day to avoid incurring unnecessary costs.
Current Election Volatility and Strategic Implications
Heading into the 2024 election, implied volatility has been elevated, reflecting the close race between Donald Trump and Kamala Harris, and uncertainty surrounding potential policy impacts. Prior to the Election Day, assets seen as indicators of support for the former president Trump showed significant volatility. Trump Media & Technology Group (DJT.O) rose by as much as 18.64% and fell by as much as 8.42%, with trading halted multiple times due to volatility. Companies in the oil and gas industry, such as ExxonMobil and Chevron, experienced gains due to market anticipation of policies favoring increased domestic production under a Trump presidency. Meanwhile, cryptocurrency stocks followed Bitcoin's upward trend, with cryptocurrency gaining approximately 4%, reflecting Trump's alignment with the sector as an advocate. Overall, the many “Trump bets” placed by the market prior to the Election Day contributed to steer high implied volatility levels.
In the 2024 Elections, the VIX has moved above its 200-day moving average, a pattern consistent with previous election cycles. The stock market’s volatility gauge was rising the day before U.S. Election Day in the light of a close election. The VIX, was up almost 3% on Monday morning, November 4th, ahead of the stock market's opening bell, at around 22.5, according to FactSet data, at last check. Since 1990, the median VIX level on the day before Election Day has been 18.4. However, this year, the VIX reached the fourth highest level among the nine Presidential Election years during this period.
Following Election Day, the VIX index dropped by approximately five basis points as the election outcome became clear quickly, easing market concerns about prolonged election uncertainty. The VIX traded around 15.9, down from an intraday peak of 23.42 the week before elections, positioning the index for its lowest close since late September.
The outlook following the U.S. 2024 elections suggests we are in an environment where a wide range of outcomes is still possible. While the clear election result has alleviated some immediate uncertainty, it has also sparked concerns about future U.S. policy directions. Our outlook takes place against the backdrop of a momentous U.S. election, with markets welcoming the decisive result that took some near-term uncertainty off the table, although medium-term policy uncertainty remains.
Traders who paid premiums for protection via SPX puts found that, during these elections, prices of those options declined rapidly once uncertainty abated. This type of "volatility crush" is similar to the behavior often seen in the implied volatility of stock options before and after quarterly earnings reports. The key takeaway is that some traders consider "buying volatility" ahead of major events but may trim or remove their hedges just before Election Day to avoid incurring unnecessary costs.
Some traders may claim this is a potential opportunity for active traders to capitalize on with long volatility strategies, such as buying SPX options spreads or call options on the VIX itself. For those looking to replicate SPX strategies with a reduced position size, there are the Mini SPX (XSP) options that are 1/10th the price. A long volatility put spread strategy in the XSP options could be considered either a bearish directional bias or a portfolio hedge. With the S&P 500 and its derivative product XSP having near all-time highs, it may seem counterintuitive to look for a bearish directional bias or hedging strategy. In this instance, if a trader is concerned that a pullback in the overall market may occur and volatility could be on the rise, then a long volatility bearish put spread would make sense.
Interestingly, investments made during periods of heightened volatility often yield positive long-term returns. On average, investments initiated on November 1 of an election year have appreciated by approximately 16.2% over the following eight months, with annual gains of 11.6% over the next decade, regardless of the winning party. High-VIX days—typically signaling market stress—have historically provided opportunities, often delivering returns exceeding 25% over the following year.
Interestingly, investments made during periods of heightened volatility often yield positive long-term returns. On average, investments initiated on November 1 of an election year have appreciated by approximately 16.2% over the following eight months, with annual gains of 11.6% over the next decade, regardless of the winning party. High-VIX days—typically signaling market stress—have historically provided opportunities, often delivering returns exceeding 25% over the following year.
Broader Market Volatility Factors
In addition to election-related factors, other global concerns have contributed to the recent rise in volatility. These include mixed corporate earnings, geopolitical tensions in the Middle East, and rising global bond yields amid inflation concerns. Additionally, upcoming economic reports and events, such as the Federal Reserve’s meeting and China’s economic stimulus discussions, are expected to impact market volatility.
On August 5, 2024, the VIX recorded its largest-ever one-day spike, surpassing levels from the 2008 financial crisis and the 2020 pandemic crash. This spike was largely driven by the widening of bid-ask spreads in illiquid put options, which are heavily weighted in the VIX calculation. This event exposed vulnerabilities in the VIX’s structure, suggesting a need for improvements in accurately gauging market stress in illiquid conditions.
In addition to election-related factors, other global concerns have contributed to the recent rise in volatility. These include mixed corporate earnings, geopolitical tensions in the Middle East, and rising global bond yields amid inflation concerns. Additionally, upcoming economic reports and events, such as the Federal Reserve’s meeting and China’s economic stimulus discussions, are expected to impact market volatility.
On August 5, 2024, the VIX recorded its largest-ever one-day spike, surpassing levels from the 2008 financial crisis and the 2020 pandemic crash. This spike was largely driven by the widening of bid-ask spreads in illiquid put options, which are heavily weighted in the VIX calculation. This event exposed vulnerabilities in the VIX’s structure, suggesting a need for improvements in accurately gauging market stress in illiquid conditions.
In sum, while U.S. election cycles and global events bring increased volatility, they also present opportunities for investors who understand the underlying patterns and manage risk effectively.
VIX Futures Trading Strategy
Given the historical VIX trends highlighted in the previous sections, we set up a strategy that leverages the mispricing of VIX futures during election times. We claim that VIX futures’ prices are particularly high in the period leading up to the elections due to the uncertainty surrounding future policy, driven by the difference in candidates’ programs. For example, Harris and Trump’s proposals on tariffs and government spending are nearly opposite in approach and could potentially cause very different economic impacts. As elections approach, investors increase their demand for volatility coverage driving up VIX futures price. As the winner is announced and future policies become more certain, we claim that VIX futures prices are likely to return to normal levels. Therefore, we aim to exploit this trading opportunity by going short on VIX futures, capitalizing on the catalyst of U.S. presidential elections. To set up this trade we will consider two trigger indicators: mean reversion and backwardation in the future’s curve.
The first entry trigger for the strategy is the presence of indicators suggesting mean reversion. By mean reversion, historical returns are expected to move gradually towards their long-term mean. This theory implies that markets tend to overreact to news, causing price to move initially away from their historical mean and eventually correct themselves, converging back to their average levels.
We quantify the distance of the VIX Index from its historical average using a Z-score defined as:
VIX Futures Trading Strategy
Given the historical VIX trends highlighted in the previous sections, we set up a strategy that leverages the mispricing of VIX futures during election times. We claim that VIX futures’ prices are particularly high in the period leading up to the elections due to the uncertainty surrounding future policy, driven by the difference in candidates’ programs. For example, Harris and Trump’s proposals on tariffs and government spending are nearly opposite in approach and could potentially cause very different economic impacts. As elections approach, investors increase their demand for volatility coverage driving up VIX futures price. As the winner is announced and future policies become more certain, we claim that VIX futures prices are likely to return to normal levels. Therefore, we aim to exploit this trading opportunity by going short on VIX futures, capitalizing on the catalyst of U.S. presidential elections. To set up this trade we will consider two trigger indicators: mean reversion and backwardation in the future’s curve.
The first entry trigger for the strategy is the presence of indicators suggesting mean reversion. By mean reversion, historical returns are expected to move gradually towards their long-term mean. This theory implies that markets tend to overreact to news, causing price to move initially away from their historical mean and eventually correct themselves, converging back to their average levels.
We quantify the distance of the VIX Index from its historical average using a Z-score defined as:
where the mean is calculated as the sum of prices over the number of observations and the standard deviation is calculated as the square root of the sum of squared deviations over the number of observations minus one. A Z-score greater than 1.5 suggests that the asset is overvalued.
The second entry trigger of the strategy is the presence of backwardation in the futures curve. In this market condition, the VIX futures curve slopes downward, indicating that the market assigns a higher implied volatility to near-term contracts compared to those with later expiration dates. This reflects a strong demand for short-term volatility protection around specific event, which is expected to revert after the uncertainty surrounding those events is solved. We quantify backwardation in the futures curve using a backwardation spread defined as:
The second entry trigger of the strategy is the presence of backwardation in the futures curve. In this market condition, the VIX futures curve slopes downward, indicating that the market assigns a higher implied volatility to near-term contracts compared to those with later expiration dates. This reflects a strong demand for short-term volatility protection around specific event, which is expected to revert after the uncertainty surrounding those events is solved. We quantify backwardation in the futures curve using a backwardation spread defined as:
where the front month refers to the contract closest to expiration, while the second month represents the contract expiring the following month. A positive spread indicates backwardation, suggesting that the market expects a drop in implied volatility in the future, and consequently a drop in the VIX level.
We backtest our strategy using historical daily data of VIX futures across three U.S. election years – 2020, 2016, and 2012. We setup the strategy as follows. First, we trade November expirations over a timeframe spanning from 30 days prior the elections to the contract’s expiration date. Second, we define entry triggers as follows: Z-test greater than 1.5 and backwardation spread greater than zero. The position is opened the first day both conditions are met over the defined timeframe. The exit triggers are defined as follows: Z-test lower than 1 and a backwardation spread equal or lower than zero. The position is closed the first day both conditions realize over the timeframe under consideration.
We define the returns of the strategy as follows.
The monetary profits and losses from the position are defined as:
We backtest our strategy using historical daily data of VIX futures across three U.S. election years – 2020, 2016, and 2012. We setup the strategy as follows. First, we trade November expirations over a timeframe spanning from 30 days prior the elections to the contract’s expiration date. Second, we define entry triggers as follows: Z-test greater than 1.5 and backwardation spread greater than zero. The position is opened the first day both conditions are met over the defined timeframe. The exit triggers are defined as follows: Z-test lower than 1 and a backwardation spread equal or lower than zero. The position is closed the first day both conditions realize over the timeframe under consideration.
We define the returns of the strategy as follows.
The monetary profits and losses from the position are defined as:
where $1000 is the point value specified by the contract.
VIX futures contracts also require an initial margin of $6,666 and a maintenance margin of $6,060. We define total margin contributions as the sum of the contributions made to restore the account to the maintenance margin level, in addition to the initial margin.
We define the returns of the strategy as:
VIX futures contracts also require an initial margin of $6,666 and a maintenance margin of $6,060. We define total margin contributions as the sum of the contributions made to restore the account to the maintenance margin level, in addition to the initial margin.
We define the returns of the strategy as:
Implementation of Strategy X
As discussed in previous sections, past U.S. presidential elections have had significant impacts on financial markets, leading to increased market volatility. Although some market players suffer as a result of increased price fluctuations caused by uncertainty, the election outcome, as well as the lead up and post-election period, can create several trading opportunities especially when trading the VIX. Strategy X, mentioned above, is an example of a strategy that could have been implemented to benefit from turbulent market conditions around the U.S. 2024 Election.
The following section of the report looks to explore the implementation of Strategy X. The section also analyses potential factors which should be evaluated when executing the strategy. These include: (i) timing; (ii) pricing errors; (iii) events not considered that could impact the VIX and (iv) margin and leverage.
Strategy X, a short VIX strategy, aims to capitalize on shifts in market fear following the 2024 U.S. election. The strategy executes trades when the following conditions (described in greater detail in the previous section of the report) are met:
1. Z-score > 1.5
2. Futures spread > 0
As evidence of its validity, Strategy X has been back-tested not only during the most recent U.S. election but also over the past three U.S. elections.
The results of Strategy X are as follows:
As discussed in previous sections, past U.S. presidential elections have had significant impacts on financial markets, leading to increased market volatility. Although some market players suffer as a result of increased price fluctuations caused by uncertainty, the election outcome, as well as the lead up and post-election period, can create several trading opportunities especially when trading the VIX. Strategy X, mentioned above, is an example of a strategy that could have been implemented to benefit from turbulent market conditions around the U.S. 2024 Election.
The following section of the report looks to explore the implementation of Strategy X. The section also analyses potential factors which should be evaluated when executing the strategy. These include: (i) timing; (ii) pricing errors; (iii) events not considered that could impact the VIX and (iv) margin and leverage.
Strategy X, a short VIX strategy, aims to capitalize on shifts in market fear following the 2024 U.S. election. The strategy executes trades when the following conditions (described in greater detail in the previous section of the report) are met:
1. Z-score > 1.5
2. Futures spread > 0
As evidence of its validity, Strategy X has been back-tested not only during the most recent U.S. election but also over the past three U.S. elections.
The results of Strategy X are as follows:
2012 Election
To provide context for the 2012 U.S. presidential election results, President Barack Obama won the presidency with 332 electoral votes, against the 206 obtained by the Republican Romney. Obama also won the popular vote, receiving 51.1% of the votes compared to Romney’s 47.2%. Pre-election polling was accurate, especially at the national level: FiveThirtyEight correctly predicted the winner in all 50 states, giving a final forecast of a 90% chance of an Obama win. Throughout the months leading up to the election, Obama was consistently favored in election forecasts, especially after the Democratic National Convention, which boosted his chances to around 80%.
With respect to Strategy X, the strong market sentiment that Obama would win the election caused a lack of uncertainty that led to a very low return of 0.050 for strategy X.
2016 Election
The 2016 U.S. Presidential Election was very unique. The results defied expectations given by the polling, which saw the Democrat Hillary Clinton ahead of the Republican Donald Trump. In fact, there were several inaccuracies regarding pre-election polling, such as the underestimation of non-college-educated voters, the late-deciding voters, and the large margin of error in state-level polls, especially in key battleground states.
As expected, Strategy X provided higher returns (0.321) in this election as market forecasts were significantly wrong.
2020 Election
The 2020 U.S. Election saw the Democrat Joe Biden, winning the presidency over the Republican Donald Trump (with respectively 306 against 232 electoral votes). This election was not as competitive as the most recent 2024 election. Polling aggregators showed that the probability of Biden winning was consistently higher than his competitor over the months preceding the elections. In fact, as the Economist and FiveThirtyEight reported, Biden consistently maintained a 10-point lead throughout the pre-election period.
As with the 2008 election, the VIX’s performance was rather steady within the range of its historical average. As a result, Strategy X’s returns were low (0.275).
2024 Election – Checking return after Election Day
For the 2024 U.S. Presidential Election, Strategy X generated the highest return of 0.707.
To conclude this section, it is notable to compare the P/L of Strategy X in each election year with the polling lead according to FiveThirtyEight:
To provide context for the 2012 U.S. presidential election results, President Barack Obama won the presidency with 332 electoral votes, against the 206 obtained by the Republican Romney. Obama also won the popular vote, receiving 51.1% of the votes compared to Romney’s 47.2%. Pre-election polling was accurate, especially at the national level: FiveThirtyEight correctly predicted the winner in all 50 states, giving a final forecast of a 90% chance of an Obama win. Throughout the months leading up to the election, Obama was consistently favored in election forecasts, especially after the Democratic National Convention, which boosted his chances to around 80%.
With respect to Strategy X, the strong market sentiment that Obama would win the election caused a lack of uncertainty that led to a very low return of 0.050 for strategy X.
2016 Election
The 2016 U.S. Presidential Election was very unique. The results defied expectations given by the polling, which saw the Democrat Hillary Clinton ahead of the Republican Donald Trump. In fact, there were several inaccuracies regarding pre-election polling, such as the underestimation of non-college-educated voters, the late-deciding voters, and the large margin of error in state-level polls, especially in key battleground states.
As expected, Strategy X provided higher returns (0.321) in this election as market forecasts were significantly wrong.
2020 Election
The 2020 U.S. Election saw the Democrat Joe Biden, winning the presidency over the Republican Donald Trump (with respectively 306 against 232 electoral votes). This election was not as competitive as the most recent 2024 election. Polling aggregators showed that the probability of Biden winning was consistently higher than his competitor over the months preceding the elections. In fact, as the Economist and FiveThirtyEight reported, Biden consistently maintained a 10-point lead throughout the pre-election period.
As with the 2008 election, the VIX’s performance was rather steady within the range of its historical average. As a result, Strategy X’s returns were low (0.275).
2024 Election – Checking return after Election Day
For the 2024 U.S. Presidential Election, Strategy X generated the highest return of 0.707.
To conclude this section, it is notable to compare the P/L of Strategy X in each election year with the polling lead according to FiveThirtyEight:
The elections of 2012, 2016 and 2024, show a correlation between the P/L of Strategy X and the election lead on Election Day. 2020’s election is a clear anomaly with a reasonably high P/L despite Biden’s lead. Factors, including the pandemic and Trump’s result contestation, could explain the unusual result.
A focus on the 2024 U.S. Presidential Election
The 2024 U.S. election created much volatility in financial markets as investors became more and more cautious about potential election outcomes. Key indicators, such as the Ice BofA MOVE Index, which tracks a yield curve-weighted measure of normalized implied volatility on 1-month Treasury options (spanning the 2-, 5-, 10-, and 30-year contracts), signaled a significant 40% rise in volatility in October. This increase suggests that investor expectations of market turbulence were increasing in anticipation of the uncertainty surrounding Election Day. Much of this uncertainty can be attributed to unclear polling between Trump and Harris.
A focus on the 2024 U.S. Presidential Election
The 2024 U.S. election created much volatility in financial markets as investors became more and more cautious about potential election outcomes. Key indicators, such as the Ice BofA MOVE Index, which tracks a yield curve-weighted measure of normalized implied volatility on 1-month Treasury options (spanning the 2-, 5-, 10-, and 30-year contracts), signaled a significant 40% rise in volatility in October. This increase suggests that investor expectations of market turbulence were increasing in anticipation of the uncertainty surrounding Election Day. Much of this uncertainty can be attributed to unclear polling between Trump and Harris.
The variety in data regarding voter preferences meant that it was very difficult to depict a clear election outlook leading up to Election Day. On the one hand, more respected media outlets, such as Reuters, predicted a Harris win, whereas Rasmussen Reports predicted a comfortable Trump win. The main implication of such uncertainty was that, for those considering the implementation of Strategy X before the election, it may have been safer to enter the position during periods of inconsistent polling as seen above. This would have allowed the polls to become clearer, making the election outcome more predictable. As a result, market uncertainty would have decreased, leading to a decline in the VIX, which aligns with the core thesis of Strategy X.
Moreover, polling data evolved over time, and this shift was somewhat aligned with the VIX's performance during the same period.
Moreover, polling data evolved over time, and this shift was somewhat aligned with the VIX's performance during the same period.
When comparing Figure 7 and Figure 8, Harris’ election lead tightened from 3% to 2% between August and November. During this same period, the VIX grew from approximately 14.80 to 21.88, reflecting a rise of 47.8%. If one predicted that this lead would further narrow to around 0%, it might have been less appealing to implement Strategy X, as the VIX could have risen in response to the increased uncertainty surrounding the election outcome.
Furthermore, it is also important to consider the timing of Strategy X. Entering the market after the election result could have been risky in the event of a Trump win. Markets may have remained turbulent if investors continued to be wary of his policies. Trump’s campaign promoted ideas and political strategies which indicated a significant regime change in international markets. Trump was and still is unclear on the extent of these policies but some of them included: (i) dismantling environmental regulation and on-shoring oil and gas production; (ii) foreign policy changes such as military non-involvement and changes in policies particularly in the Middle East; (iii) introduction of new tariffs on imports, especially on China. This uncertainty meant that entering a short VIX position after the election result with a Trump win may not have been of interest. On the other hand, a Kamala win could have signified an entry point for Strategy X. Her lack of policy divergence from Biden’s previous policies meant that her victory could have led to market stability as U.S. policy would likely remain in line with previous expectations set under Biden.
In summary, Strategy X should only be implemented if one has a clear understanding of polling and market sentiment regarding the election. If polling suggests that there will be a clear winner, there may be no reason to enter a short VIX position as markets are likely to already be pricing in the election result.
“Fat Finger” error
Given that Strategy X relies on price data as the primary instrument for its indicators, rather than using factors like volume or momentum, pricing errors can have significant implications on the strategy’s effectiveness. The use of spot and futures pricing to calculate the presence of backwardation must be precise to ensure that the condition has been met with a high degree of confidence.
Significant market players have made pricing mistakes in the past, leading to substantial losses. Amaranth Advisors, a hedge fund that once managed $9 billion, suffered a loss of $6 billions in 2006 due to mispricing in its risk models and assumptions about market recovery. Moreover, Long-Term Capital Management (LTCM) lost $4.6 billion in 1998 after overly complex mathematical models which wrongly predicted market behavior during the Russian financial crisis.
With respect to Strategy X, the use of incomplete or incorrect data could be detrimental to the success of the Strategy as well as the overall success of a trader, if resulting in a loss.
Exogenous mean reversion disruptions
The aim of Strategy X is to profit from the excessive uncertainty during the election period. By doing so, the strategy is exposed to other events which can also have a large price impact on the VIX Index. Looking at a potential recent implementation of Strategy X, current geopolitical tensions both in Russia/Ukraine and in the Midde East would have also had an impact on the VIX. For instance, following Iran’s excessive missile attack on Israel on October 1, 2024, spot VIX rose from 19.1 to 20.4 (+6.8%). This event, however, fell outside the scope of Strategy X, which was focused on election-related volatility. Moreover, this event put upside pressure on the VIX, which is counter to the strategy’s aim to short the VIX due to unreasonable levels of market fear. The mean reversion trigger is founded on the principal that markets tend to overreact to news, causing price to move initially away from their historical mean and eventually correct themselves, converging back to their average levels. Such exogenous market events can potentially disrupt the mean-reverting pattern, causing the price to not come back towards its historical average.
Margin and leverage
Effective risk management is paramount when trading VIX futures due to their inherent volatility. Strategy X requires the trader to deposit an initial margin of $6,666 and sustain a maintenance margin of $6,060. Given that Strategy X is a shorting strategy, for a margin call to be called, must be greater than 0.606. As mentioned above, on October 1, spot VIX rose from 19.1 to 20.4. If Strategy X had executed a short position in this time frame, the position would have required significant margin reinforcements. Hence, liquidity means should be readily accessible when executing Strategy X to ensure available margin and to prevent the broker from liquidating the position.
Conclusion
Strategy X offers a compelling opportunity to capitalize on the significant volatility shifts that typically follow U.S. elections, as historical back testing confirms. This is especially true when the election result is more uncertain based on pre-election polling. Higher pre-election VIX levels typically correspond to tighter polling between candidates, which then lead to significant VIX-shorting as the election outcome becomes clearer and uncertainty diminishes. Hence, Strategy X proved to be most profitable when implemented in the 2024 U.S. Election period.
Nevertheless, regardless of the past success of Strategy X, the report concludes that it is important to consider specific risk factors when implementing Strategy X. The strategy must be executed with precision and diligence to prevent pricing errors. Moreover, the timing of the strategy is significant especially considering changing polls as well as external market events which could impact the VIX Index. Overall, even though Strategy X could be profitable for VIX traders, there is no guarantee that it would succeed in future elections.
Furthermore, it is also important to consider the timing of Strategy X. Entering the market after the election result could have been risky in the event of a Trump win. Markets may have remained turbulent if investors continued to be wary of his policies. Trump’s campaign promoted ideas and political strategies which indicated a significant regime change in international markets. Trump was and still is unclear on the extent of these policies but some of them included: (i) dismantling environmental regulation and on-shoring oil and gas production; (ii) foreign policy changes such as military non-involvement and changes in policies particularly in the Middle East; (iii) introduction of new tariffs on imports, especially on China. This uncertainty meant that entering a short VIX position after the election result with a Trump win may not have been of interest. On the other hand, a Kamala win could have signified an entry point for Strategy X. Her lack of policy divergence from Biden’s previous policies meant that her victory could have led to market stability as U.S. policy would likely remain in line with previous expectations set under Biden.
In summary, Strategy X should only be implemented if one has a clear understanding of polling and market sentiment regarding the election. If polling suggests that there will be a clear winner, there may be no reason to enter a short VIX position as markets are likely to already be pricing in the election result.
“Fat Finger” error
Given that Strategy X relies on price data as the primary instrument for its indicators, rather than using factors like volume or momentum, pricing errors can have significant implications on the strategy’s effectiveness. The use of spot and futures pricing to calculate the presence of backwardation must be precise to ensure that the condition has been met with a high degree of confidence.
Significant market players have made pricing mistakes in the past, leading to substantial losses. Amaranth Advisors, a hedge fund that once managed $9 billion, suffered a loss of $6 billions in 2006 due to mispricing in its risk models and assumptions about market recovery. Moreover, Long-Term Capital Management (LTCM) lost $4.6 billion in 1998 after overly complex mathematical models which wrongly predicted market behavior during the Russian financial crisis.
With respect to Strategy X, the use of incomplete or incorrect data could be detrimental to the success of the Strategy as well as the overall success of a trader, if resulting in a loss.
Exogenous mean reversion disruptions
The aim of Strategy X is to profit from the excessive uncertainty during the election period. By doing so, the strategy is exposed to other events which can also have a large price impact on the VIX Index. Looking at a potential recent implementation of Strategy X, current geopolitical tensions both in Russia/Ukraine and in the Midde East would have also had an impact on the VIX. For instance, following Iran’s excessive missile attack on Israel on October 1, 2024, spot VIX rose from 19.1 to 20.4 (+6.8%). This event, however, fell outside the scope of Strategy X, which was focused on election-related volatility. Moreover, this event put upside pressure on the VIX, which is counter to the strategy’s aim to short the VIX due to unreasonable levels of market fear. The mean reversion trigger is founded on the principal that markets tend to overreact to news, causing price to move initially away from their historical mean and eventually correct themselves, converging back to their average levels. Such exogenous market events can potentially disrupt the mean-reverting pattern, causing the price to not come back towards its historical average.
Margin and leverage
Effective risk management is paramount when trading VIX futures due to their inherent volatility. Strategy X requires the trader to deposit an initial margin of $6,666 and sustain a maintenance margin of $6,060. Given that Strategy X is a shorting strategy, for a margin call to be called, must be greater than 0.606. As mentioned above, on October 1, spot VIX rose from 19.1 to 20.4. If Strategy X had executed a short position in this time frame, the position would have required significant margin reinforcements. Hence, liquidity means should be readily accessible when executing Strategy X to ensure available margin and to prevent the broker from liquidating the position.
Conclusion
Strategy X offers a compelling opportunity to capitalize on the significant volatility shifts that typically follow U.S. elections, as historical back testing confirms. This is especially true when the election result is more uncertain based on pre-election polling. Higher pre-election VIX levels typically correspond to tighter polling between candidates, which then lead to significant VIX-shorting as the election outcome becomes clearer and uncertainty diminishes. Hence, Strategy X proved to be most profitable when implemented in the 2024 U.S. Election period.
Nevertheless, regardless of the past success of Strategy X, the report concludes that it is important to consider specific risk factors when implementing Strategy X. The strategy must be executed with precision and diligence to prevent pricing errors. Moreover, the timing of the strategy is significant especially considering changing polls as well as external market events which could impact the VIX Index. Overall, even though Strategy X could be profitable for VIX traders, there is no guarantee that it would succeed in future elections.
by Gauri Gupta, Boaz Lister, Nem Giuseppe Marra and Lorenzo Monteduro
Sources
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