By: Spencer Israel
Typically, Election Day is a binary event: either the democratic or republican candidate wins, and any level of uncertainty is squashed by the time the west coast heads to bed.
But 2020 is anything but typical, and questions abound beyond simply who will win.
Chief among them is whether the results will be contested, and if so how long the struggle will last.
The only reference point we have for that situation is 2000—and markets weren’t especially thrilled with that political tumult. From Election Day of that year (Nov. 7) to the day Al Gore officially conceded (Dec. 13) the S&P 500 fell from 1431.87 to 1359.99, a 5% decline.
This uncertainty presents a particular challenge for options traders looking to hedge against the election. How far out are you supposed to go if you don’t know when the results will be final?
What The Options Market Is Telling Us Right Now
In August, Deutsche Bank wrote to clients that the options market didn’t appear to be pricing in enough post-election volatility. But that appears to have changed.
As Goldman Sachs recently noted in note of its own, options traders appear to be placing trades further out in time, a trade predicated on volatility staying elevated for weeks after the election.
The firm specifically reported that the implied volatility in S&P 500 options is pricing in a 2.8% move the day after Election Day, a slight decline from August’s projected move, while the IV in November VIX contracts—which coincide with volatility in December—have risen above those of October.
Looking Beyond 2020
Regardless of the outcome on Nov. 3, traders need to have two dates on their radar: Dec. 8 and Dec. 14. The former is the “safe harbor” deadline for states to finalize their Electoral College electors, and the latter is when said electors cast their final votes.
One way or the other, it’s highly unlikely any contention would spread deep into 2021, lest we get to Jan. 20 and House Speaker Nancy Pelosi gets inaugurated.
And as far as implications on markets, U.S. Bank laid it out clearly:
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