Stock traders have begun to bet that the market will fluctuate greatly before and after the November US election. Another confrontation between US President Joe Biden and former President Trump is brewing.

The Vix Index is a so-called “panic indicator” that measures expectations of recent fluctuations in the S&P 500 index. Futures contracts linked to this index reflect increased market volatility in the weeks before and after American voters vote.

The US election in the past caused significant market fluctuations, which gave investors a reason to bet or hedge. In November 2016, Trump unexpectedly defeated Hillary, causing S&P 500 futures to fall briefly, then the stock market began to rise.

However, Mandy Xu, head of market intelligence at Cboe Global Markets, said: “This year, traders began considering the impact of the election on the Vix Index earlier than before.” It is worth mentioning that Cboe Global Markets is the compiling agency for the Vix Index.

Mandy Xu added that, as is customary, “about two to three months before an election, you may begin to observe relevant (betting or hedging) phenomena”.

Although investors cannot directly trade the Vix Index, they can buy related futures contracts. The prices of these contracts reflect what traders think the Vix Index will trade at different points in time over the next few months.

The Vix index curve shows that the index will rise steadily over the next six months starting from the current level of 12.8. The October contract, which expires soon after the November 5 election day, shows that the Vix index will exceed 20 points at that time.

Currently, market volatility is relatively low. Since the beginning of 2023, the Vix Index has been below the historical average of around 20 points, despite uncertainty about the path of US inflation and interest rates.

The shape of the Vix futures curve is in stark contrast to four years ago, and the direct fluctuations in November 2020 due to the COVID-19 pandemic far exceeded expectations at the time. At the beginning of 2016, Vix Futures did not show a significant surge in market volatility due to the upcoming election.

Recent polls show that the approval ratings for Biden and Trump are mixed. UBS analysts wrote last week that they “won't be surprised by increased stock market volatility” as the general election approaches.

HSBC stock strategists Nicole Inui and Alastair Pinder echoed this forecast in a report to clients on Monday, saying they expect the election to lead to “more turbulence” in the second half of this year.

When the stock market rebounds, it is not unusual for it to fluctuate less, as has been the case in the European and US markets since late October last year. Goldman Sachs, Bank of America, and Société Générale have all recently raised their year-end price predictions for the S&P 500 index. However, some analysts recently suggested that the growth of those options strategies incorporated into equity ETFs may have weighed down the ViX Index.

Traders of this type of product buy stocks when the market falls and sell stocks when the market rises. A March report from the Bank for International Settlements said that by doing so, traders “effectively curbed” “price changes” in the S&P 500 index.

The report added: “In the past two years, profitable structured products linked to the S&P 500 have risen rapidly, and at the same time, the Vix index has also declined.”

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