11.03.2016

Equity Traders Are Preparing for a Tsunami Amid Tranquil Seas

(this article originally appeared on Bloomberg)

Markets have been unusually calm in the run-up to the U.S. presidential election, with realized one-month volatility for the S&P 500 index tumbling throughout October.

But traders are preparing for this to end very soon, as evidenced on Tuesday morning by the surge in the CBOE Volatility Index to above 18 — a level it hasn’t breached since mid September. The index, also known as the VIX, is a measure of the S&P 500’s implied volatility over the next month derived from options prices.

The spread between one-month implied and realized volatility for the benchmark equity index has been higher less than one percent of the time over the past three years, Bloomberg Tradebook’s Charlie Miles observed.

“Uncertainty surrounding the U.S. presidential election appears to be the culprit,” he wrote.

The last two times the spread reached these levels was amid the market turmoil that followed the depreciation of the Chinese yuan in August 2015, and ahead of the Brexit referendum in June.

With few exceptions, the spread between implied and realized equity volatility is at uncommonly stretched levels in many markets worldwide.

Pravit Chintawongvanich, head derivatives strategist at Macro Risk Advisors, said that it wasn’t abnormal to see these spreads move in a similar fashion across different geographic regions, and added that there’s more than just the election at play.

“We had the Fed, NFP on Friday, elections Tuesday, and then we have Decemeber FOMC in a month,” he said. “So there are a lot of events in the very near term that are contributing to that high implied vol.”

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