Why investors are paying record premiums for election-related market volatility

As the 2020 U.S. election approached, investors faced unprecedented costs to hedge against potential market instability. This video examines how the VIX futures market priced this specific event risk, revealing a unique premium that surpassed any previous historical data.

In the lead-up to the 2020 election, market participants utilized a strategy known as a 'butterfly trade' to bet on volatility. By comparing the costs of VIX futures contracts expiring in September, October, and November, investors identified that the October contract—which covered the election period—was significantly more expensive than the surrounding months. This specific pricing structure, resulting in a reading of -6.9, indicated that investors were willing to pay a record-breaking premium to protect their portfolios against expected volatility during the election month.

While VIX futures have been traded since 2004, this level of forward-dated volatility pricing for a specific event was unprecedented. Interestingly, this heightened risk perception was largely localized to the U.S. stock market, as international stock volatility and the MOVE Index, which tracks Treasury bond volatility, did not reflect the same extreme pricing pressures.

Source: The VIX Index and US Elections | Trump Biden 2020 | VIX Futures | Risk Management