VIX futures sound early alarm! U.S. midterm elections in November expected to become a window of high volatility for U.S. stocks

According to Zhitong Finance APP, while Nvidia (NVDA.US) earnings and Federal Reserve Chairman Kevin Walsh’s speech at Jackson Hole are the main events investors are focusing on this week, traders in the equity derivatives market have already begun preparing for a potential rise in volatility around the U.S. midterm elections in November.

Volatility traders closely watching futures tied to the Chicago Board Options Exchange (Cboe) Volatility Index (VIX) have pointed out a growing demand to hedge against possible swings in the S&P 500 index before and after the election. VIX futures expiring in September are currently trading at around 17.4, but the October contract has risen to 19, and the November contract has further climbed to 19.7.

Matthew Thompson, co-portfolio manager at Little Harbor Advisors, said in an interview: “The U.S. election is approaching, and you’re already entering a time window where the election is affecting the VIX.” “You can already see this bump in the VIX futures term structure.”

VIX Expected to Climb Further Before the Midterm Elections

It’s not surprising that traders are starting to prepare for stock market volatility before and after the election, because historically, political uncertainty in midterm election years tends to increase market volatility. According to a study by Cboe Global Markets Inc. analysts, since 1945, actual volatility during midterm election years has been higher than the previous year 80% of the time, with an average rise of 3.5 volatility points. In years when the same party controls both the White House and Congress, volatility increases by an average of 6 percentage points. Cboe data shows that the S&P 500 index also tends to perform more weakly during midterm election years, with an average return of 4% and a median of just 1%.

This year’s situation may be even more significant, as bipartisan opposition to planned artificial intelligence (AI) data center construction in the U.S. is triggering increasingly strong voter backlash, while related spending plans have been one of the critical drivers of this year’s stock market gains.

Moreover, the focus is not only on congressional elections. The Bank of America strategists led by Michael Hartnett are particularly focused on the re-election of Texas Governor Greg Abbott. They warn that if the Democratic Party takes control of both the Senate and the Texas governorship, the stock market could fall by more than 10% next year, reaching what is typically considered a “correction.”

Cboe’s main exchange recently introduced daily S&P 500 index options expiring on Election Day and the following day, allowing traders and strategists to start monitoring the market’s expected volatility around the election outcome. Currently, these options are pricing in an expected one-day implied move of about 1.4% for the S&P 500 on November 4—the day after the election. Mandy Xu, Head of Derivatives Market Intelligence at Cboe, said: “Now that these options are listed, you’ll start to see more and more election-related trades emerge.”

Additionally, there is speculation in the market that President Trump and Treasury Secretary Bessent may try to keep the stock market strong before the election. SpotGamma co-founder Brent Kochuba said: “It can be assumed that Trump and Bessent will push to keep this going.” He added that as long as Federal Reserve Chairman Walsh signals his support for the Treasury Secretary’s efforts to stabilize the bond market, it would be enough to send a message of risk appetite to investors. He stated: “Don’t bet against Bessent and Trump.”

Of course, the rise in October VIX futures may also have other causes, including a seasonal tendency for U.S. stock market volatility to increase in the fall. Brent Kochuba said: “There’s clearly a bump, but the VIX term structure also has seasonal factors.”

Regardless, even with this “bump” in the VIX curve, options traders point out that now is a good time to buy cheap equity volatility protection. The spot VIX index closed at 15.8 on Monday, well below its historical average of 19.4. Brent Kochuba said: “Insurance is really cheap right now.” “If you are holding stocks and want to hedge, now is the time to have options.”