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Credit Suisse Equity Derivatives Strate y***
To:
Suisse Equity Derivatives Strategy***
{Header 1}
Market Volatility Bulletin
Election Risk Underpriced?
Link to Report: Market Volatility Bulletin
Implied volatilities declined significantly across asset classes
last week. Vols are currently at/near 1-year lows for equities, rates, gold,
and several FX pairs (EUR, CHF, AUD). The only exception is oil. WTI 1M
implied surged 4.6 vol pts last week to 42% on speculation of potential
supply cut. USO (oil ETF) skew flattened significantly on call demand.
Ahead of tonight's debate, it's remarkable how little election risk
is currently being priced into the equity vol markets. Both VIX spot and
futures are near lows. SPX weekly options are pricing in less vol for the
election than for an average Fed meeting (see chart below). This is despite
a recent tightening in the polls.
Our analysis shows that historically elections have been meaningful
drivers of equity volatility. Over the past 6 elections, the VIX has
increased every single time in the month leading up to Election Day, with an
average gain of 3.5 vol pts. Looking back further at all post-war elections
(1948-2012), we find that realized volatility is highest in October of an
election year than any other month during election season (Jul-Nov). Given
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this setup, we like buying VIX call spreads for investors looking to
position for a similar pickup in volatility this year. See pg 14 for trade
details.
Chart: SPX Weekly Options Pricing in Less Volatility for the Election Than a
Fed Mtg
Source: CS Equity Derivatives Strategy
MORE INSIDE (Market Volatility Bulletin)
Mandy Xu, CFA
Equity Derivatives Strategy
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1.
Call or Put Purchasing: The risk of purchasing a call/put is that
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2.
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spread transaction is limited to the premium paid when the position is
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