Volatility typically spikes in October. History suggests that a replay is probable. The charts summarize the findings of the last 7 presidential election cycles going back to 1988. We used VIX data for the past 6 cycles and VXO (volatility index on the S&P 100) for the 1988 cycle (previous election years were omitted due to lack of volatility data). Given that volatility spiked in every October of a presidential election year, with no exception, the implication is that it should pay to hold some form of insurance heading into this October.
The way we are recommending to hedge long equity positions is by buying a VIX 20- 25 bullish call spread for November expiry (capturing the election result), and in order to bring down the cash outflow we would simultaneously sell a 12.5 November VIX put. The total cost for this hedge is $0.65/contract with a maximum gain capped at $5/contract.
There is downside risk with selling the put option, but we doubt the VIX will fall below 10 (10.32 is the recent closing low), thus the risk to the downside is losing the $0.65/contract plus $2.18/contract assuming the VIX collapses to the 2014 closing low.
For additional details, please access the “Quarterly Review And Outlook” at gss.bcaresearch.com.
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