VIX futures expiring in November closed at 32.93, which implies that many investors might be turning toward November’s presidential elections as a source of risk.

The VIX has been in the spotlight this year, as the global markets have witnessed significant volatility as a result of the Covid-19 pandemic. VIX, also known as the fear index, is calculated based on the S&P 500 options and reflects market expectations on (implied) volatility in the coming 30 days.

Unlike classic indices, VIX’s growth represents negative sentiment or increased risk of market volatility. VIX levels over 30 could be considered risky as the market is expecting high volatility.

US indices Dow Jones and S&P 500 observed a break in almost uninterrupted rally from its March lows as a result of the negative sentiment on further possible restrictions regarding the Covid-19 pandemic. On a YTD basis, Dow Jones is down 4.8%, while the S&P 500 is still up by 2.1%. Meanwhile, earlier this year, both indices observed a decrease higher than 20% in less than a month (compared to the 52-week peak) witnessing the fastest bear market in history.

YTD Performance of VIX

Source: Bloomberg, InterCapital Research

Since, the S&P and VIX are negatively related, this year’s market conditions (the combination of Covid-19 outbreak and an oil price war between Russia and Saudi Arabia) have led to a surge in the VIX index. It is worth noting that VIX was last time seen at the levels observed this year during the financial crisis in 2008. In March, VIX observed two sharp daily increases this month. The first one was on 12 March, which coincided with President Trump introducing the European travel ban. Meanwhile, on 16 March the index reached 82.69, which is the highest value since the CBOE (Chicago Board Options Exchange) introduced the new methodology for the index in 2003.

Since the beginning of the year, VIX has more than doubled and currently stands at 26.38. However, since its peak in March (up until end August) the index has been gradually decreasing as the positive sentiment on the equity market has continued. In September, VIX was somewhat elevated, reaching as high as 33.6. It is also worth noting that VIX futures expiring in November closed at 32.93, which implies that many investors might be turning toward November’s presidential elections as a source of risk. Note that the presidential elections will take place on 3 November.

VIX vs S&P500 (2003 – 19 Aug 2020)*

*indexed value relative to base year (2003)