A 2025 Outlook, What Options Pricing May be Indicating?

Guest Author: Dennis Davitt, CEO of MDP

The November Market Phenomenon: Rallying Stocks and Falling Volatility

Over the last three years, November has emerged as a statistically significant month for U.S. equity markets, particularly the S&P 500. On average, the benchmark index has rallied 6.86% during the month, while the VIX—the market’s leading measure of volatility—has collapsed by 30.31%. This recurring pattern stands out not only for its consistency but also for its magnitude relative to other months of the year. While November often carries a sense of renewed optimism in markets, recent years have provided a particularly noteworthy combination of factors, including major elections, risk repricing in the options market, and a shift toward perceived “normalcy.”

Historical Context: The 2020 Election Parallel

To put this into perspective, consider 2020, when the S&P 500 surged nearly 11% in November while the VIX cratered by 41%. That year, the market faced one of the most contested and widely scrutinized U.S. presidential elections in modern history. What’s fascinating is that the same two candidates are back in the spotlight in 2024, yet the market’s reaction—at least based on options pricing going into the election suggested anarchy on to realize complacency. Despite considerable political uncertainty in 2020, the post-election environment aligned perfectly with the historical trend of November rallies and volatility collapses. In 2024, like in 2020 the markets largely shrugged off the noise and focused on a resumption of economic activity, monetary stimulus, and investor optimism.

This trend underscores a broader truth: elections tend to be short-term noise for markets, regardless of political outcomes. The consistency is notable - stocks go up, and volatility goes down. Investors, perhaps anticipating a clearer policy trajectory post-election, seem to consistently reverse from protection of gains to fear of missing out.

The Volatility Market Reaction: A Uniform Sell-Off

As we pointed out November’s recent performance in equity markets was accompanied by a broad sell-off in volatility, decreasing option prices on all tenors and strike prices. From short-dated options to longer-term protection, there was a clear repricing lower. This phenomenon represents a lateral shift downward across all forms of risk hedging. When volatility collapses at such scale, the entire options market experiences a reset. I recall in the past this being referred to a wet blanket on volatility.

For example, at MDP, we observed that tail-risk protection options—structured to hedge against catastrophic sell-offs—declined significantly in price post the election, however, leading into the November election, the cost of our crash-protection doubled, reflecting heightened pre-election fears. However, this spike was short-lived. As markets rallied and volatility collapsed, these prices retraced to more normalized levels. At MDP, we allocate an annual risk budget of 0.75% to crash protection strategies. The pre-election surge in put pricing tested that budget. Fortunately, by financing the tail-risk hedges through other parts of our options strategy, we maintained a net positive outcome. This highlights the importance of balancing risk exposure with active management and structural flexibility within options portfolios.

Outlook for 2025

Looking ahead, 2025 carries many of the same risks that we observed heading into 2024 but with a new (old) president. However, the options market appears surprisingly sanguine about the potential economic and geopolitical ramifications of a Trump re-election. According to implied volatility levels, options traders are currently pricing in minimal disruption—a stance that may reflect discretionary overconfidence or complacency.

Historically, markets have overestimated the volatility of major political events and by definition underpriced the yet to be unknown, which kind of makes sense, I mean how could you? This disconnect raises questions about investor positioning as we approach year-end and transition into 2025. Options traders, while well-versed in hedging mechanics, have often failed to anticipate major macroeconomic shifts. The recent repricing lower of protection reflects optimism, but it also exposes portfolios to potential shocks should volatility resurface.

The broader takeaway which may be upsetting to some of us, yet is clear to many of us is: options markets are not always reliable predictors of risk, particularly during periods of political and economic uncertainty. While options investors appear confident that markets will glide smoothly into the new year, recent history suggests otherwise. As Stevie Wonder famously sang in 1972, “Don’t You Worry ‘Bout a Thing.” While Stevie was a brilliant lyricist, he’s far from the first choice for options-hedging advice. Then again, based on recent Novembers, neither was the options market.

Conclusion: Balancing Optimism with Risk Awareness

The November market pattern—rising stocks and collapsing volatility—has proven remarkably consistent over the last three years. This trend was amplified in 2020, an election year marked by political uncertainty and economic disruption. However, in 2024 markets once again defied expectations, rallying sharply while volatility cratered.

At MDP, we continue to monitor option pricing dynamics closely. By actively managing risk and maintaining structural flexibility in our options portfolios, we aim to capitalize on opportunities while protecting against unforeseen shocks. The lesson from recent Novembers is clear: markets may rally, but risk never truly disappears. For investors, the challenge lies in balancing optimism with preparation—and avoiding the pitfalls of misplaced complacency.

About the Author

Prior to founding MDP Dennis was a Partner/Portfolio Manager at Harvest Volatility Management where he developed multiple option strategies. Total AUM in these strategies was over $950M in assets.

Dennis was the Head of Americas Equity Derivatives for Credit Suisse and Macquarie Bank where he had responsibility for all aspects of trading and risk management from proprietary trading, automated market making, exotics, corporate, LATAM, and flow trading (both index and single stock), a group encompassing over ten billion dollars of the bank’s capital. While at Credit Suisse, Dennis helped develop the firm’s structure on integrating all the above products under one common risk mandate.

The Credit Suisse Fear Barometer (CSFB) created by Dennis in 2008 is a way to measure put demand in the marketplace and thus a strong indicator of the desire for downside protection which can be interpreted as fear of a market correction. This tool is still an integral part of many derivative research pieces written today.

As an original member of Wolverine Trading in the SPX pit in Chicago, he learned the value of liquidity, and how to adapt to changing markets and innovate inside the old ones. Dennis has been a guest writer for the popular volatility column “Strike Price” in Barron's and has often been invited to provide market color and option commentary on television.

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