Deutsche Bank Sees VIX Curve Out of Line With Election Risk

(Bloomberg) -- In a pandemic-ravaged world where concern is running high something will happen to muddle the outcome of November's presidential election, options traders are a picture of peace.

Rather than betting on markets staying turbulent after the Nov. 3 vote, traders are positioned for a steep post-election drop in the Cboe Volatility Index, or VIX. The pattern is “far out of line” with what happened in the last two elections, according to Binky Chadha, chief global strategist at Deutsche Bank.

Typically, traders price higher volatility in longer-dated options than they do shorter-dated ones, on grounds the future normally gets harder to predict the further away it is. That usually produces an upward-sloping curve in prices for options protection, as dealers charge more for longer-dated contracts. Right now, the VIX curve slopes upward only until October, just before the election. From there on, it falls -- a sign that traders are expecting volatility to quickly subside after the vote.

“While this may reflect vaccine hopes, we see this pricing for November and December vol as too sanguine,” Chadha wrote in a note to clients. “With a pandemic-induced, likely unprecedented volume of mail-in ballots, we see considerable risks to getting a quick and clear election resolution this time around, with the prospect that volatility endures post-election day.”

Tracking the price difference between VIX futures, Deutsche Bank found that this year, contracts expiring in November have traded at a discount to those expiring in October. That's a departure from the election years in 2012 and 2016, when the longer-dated futures fetched a premium at this time.

VIX's spot price fell for a fourth day to 23.55 as of 12:25 p.m. in New York, heading for the lowest level since February.

Read: Trump Floats, Then Flips on Idea to Delay Election Day

Last week, President Donald Trump floated the idea of delaying the vote until after the coronavirus risk eases. He argued, without evidence, that mail-in voting will be subject to widespread fraud.

That raises the potential for the election dragging on and feeding into market uncertainty, according to Chadha.

“President Trump has already taken the position that mail-in voting is prone to fraud, suggesting that if he loses he may contest the results and not concede,” Chadha said. “So, uncertainty about the results could prevail well after the election.”

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