U.S. Election 2024: What the Options Data Says

Listed options serve multiple purposes in today’s financial markets, from basic hedging and income overlays to quantitative investing strategies and even as the foundation for an entire ecosystem of structured products and defined-outcome exchange traded funds (ETFs). Another crucial benefit comes from the insight the options markets provide into forward-looking expectations and sentiment, aiding decision-making for traders and non-traders alike.

A unique feature of the U.S. election taking place on November 5, 2024, is the availability of index options with daily expiration cycles in the days leading up to, and after, the event. While the popular Cboe Volatility Index® (the VIX® Index) gauges market volatility expectations on a 30-day time horizon, daily options enable volatility estimates at a finer granularity, making it possible to isolate market expectations around a significant event, like the election.

We used a real-time model-fitted implied volatilities for these daily expiration cycles from Cboe Hanweck – accessed through the Trade Alert API  – to visualize the simple term structure of S&P 500 Index options (SPX) at-the-money volatility.  There is a clear ‘bump’ visible in contracts expiring at the end of the day on November 6, the date many anticipate the election results to be known.

SPX Options Implied Volatility by Expiration Date

Source: Cboe Global Markets October 2024

Currently, implied volatilities for November 6^th options are near 19.5%, compared to approximately 15% for shorter-term contracts. Because these term volatilities represent expectations for the entire remaining duration of a contract rather than a single day, a ‘forward volatility’ calculation is used to isolate expectations for each individual trading day over the next several weeks.

SPX Options Daily Forward Implied Volatility

Source: Cboe Global Markets October 2024

Among forward volatilities, the peak, 35% annualized volatility on November 6, represents the market’s estimate of the expected move on that specific date. Applying basic statistics, this 35% implied volatility translates to a daily standard deviation of about ±2.2%, indicating a 68% probability of a move within this range and a 95% chance of a move within ±4.4%. This leaves only a 2.5% chance of a move beyond ±4.4%.

Options data can also reveal changes in both the level and shape of a given options expiration volatility curve. For example, from October 22 to October 29, Cboe Hanweck model-fitted volatilities for November 6 daily SPX options showed a notable change in at-the-money implied volatility, increasing from approximately 14.5% to 18.5%.

Source: Cboe Global Markets October 2024

The two bell-shaped charts above leverage market prices and options theory to illustrate the probability of different options price levels. Between October 22 and 29, the change in risk expectations is visible as both tails of the distribution curve increase, reflecting higher volatility. The negative skew, seen as a “fat left tail,” reflects typical market behavior and the supply and demand dynamics of index options. Current prices imply a 5% probability of a 10% market drop by expiration, while the probability of a similar increase is less than 2%. While these approaches are statistically sound, it is essential to recognize that skew and probability indicate market expectations but do not predict the future. They also provide an opportunity for traders to express different views by buying or selling contracts based on alternate expectations.

As the U.S. election draws near, Cboe is prepared to help market participants manage risk with tools, data and analytics to meet your needs.

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