ab29 January 2024Global Research and Evidence LabUS Equity Derivatives StrategyWith liberty and justice for vol: Trading the VIX term structure for US electionsTrade ideas to consider (upon listing, as applicable):VIX Sep/Oct ATMF put calendars (buying Sep)VIX Nov/Oct ATMF straddle swaps (buying Nov; delta-hedged or unhedged)Presidential election years tend to produce positive US equity returns both pre- and post-elections. US equity volatility also tends to rise in tandem ahead of elections, before compressing post-elections into year-end (Figures 3-4).US elections this year could again provide opportunities across the volatility term structure. Using the 2016 and 2020 elections as a playbook, we expect risk premia to be baked in well ahead of elections in November – We already see ~a half point of volatility in the SPX options term structure (Nov vs. Oct regular expiries, respectively), and a more notable >3pt. premium in the VIX Oct future recently listed (vs. VIX Sep). The VIX futures curve typically provides a more effective way to capture event risk, in our view. The VIX Oct contract technically captures US election event risk via the 30-day forward SPX options strip, but expires a few weeks prior to the actual election date. We would thus expect the VIX Oct future to remain relatively bid into expiry. Following Oct expiry, the Nov contract will be the front-month contract most reactive to any potential event risk coming to fruition post-event (Figures 5-9).Investors may consider capturing rolldown prior to elections via selling VIX Oct puts to fund VIX Sep puts. Additionally, investors looking to hedge any 'fireworks' subsequent to actual elections may consider selling VIX Oct straddles to buy VIX Nov straddles, either delta-hedged or unhedged (Figures 10-14).Figure 1: VIX term structure already reflecting a significant risk premium for US elections via the newly-listed Oct contract1213141516171819202122SpotFeb-24Mar-24Apr-24May-24Jun-24Jul-24Aug-24Sep-24Oct-24Current1w Ago2w AgoSource: Bloomberg, UBS; Current levels a/o 29-Jan intradayFigure 2: US election-related risk premia in 2020 was the largest ever, second only to 2017 French elections05101520-35-45-55-65-75-85-95-105-115-125-135-145-155# Trading Days Pre-Elections (Approx.)VIX 2020 US Election (Sep/Oct/Nov Fly)VIX 2016 US Election (Sep/Oct/Nov Fly)V2X 2017 French Election (Mar/Apr/May Fly)VIX 2024 Current (Oct-Sep Spread)Source: Bloomberg, UBSAs featured in our 2024 Global Equity Derivatives Strategy Outlook: Using the 2016 and 2020 elections as a playbook, we expect risk premia to be baked in well ahead of elections in November – We are already starting to see this play out (Figures 1-2). We present two ideas to trade the VIX term structure for US elections.This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Q...
