Cem Karsan interviews Edward Tom, Senior Director at CBOE and Noel Smith, Managing Partner and CIO of Convex Asset Management on what the options market position is telling us about risk and return before and after the US Presidential Election.
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Here are my notes. I try to simplify some cheem stuff but there is a limit to what I can do.
What Does the Data in the CBOE Markets Tell Us about the Pricing Now and After the Election? We are observing additional risk premiums as part of the elections. Usually, the risk premiums dissipate after the election, but we are not observing this dissipation now. The data shows that the risk premiums will only dissipate 2 weeks after the election. The risk premium here may be attributed to the risk of a contested election. If the election is contested, it takes different time periods to resolve the contest. There have been past contested elections that took 5 months to resolve (this was 100 years ago), but there are also those that took 5 weeks to resolve. There is a possibility that a risk premium of 2 weeks may be too short to resolve this election. Tom is seeing increased convexity at the VIX Call Skews. This means that volatility trades are playing a big market move to the upside or the downside. So they are selling the at-the-month options to fund the out-of-money options. As an aggregate, this causes the option skew to be convex. Interesting things we are seeing from the options skew. Noel Smith of Convex Asset Management put out a VIX Nov Call Spread Trade where the Strike is at 30 and 40 for between $0.45 to $0.52. What
