As Election Day approaches, market volatility is on everyone’s radar. Wall Street is watching how much movement might occur across major assets, and Citi’s Sales & Trading desk (S&T) has some noteworthy insights into the pricing of options for November 6th. Here’s a closer look at where things stand and what investors might expect on Election Day.

S&P 500 (SPX) Options Pricing: Slightly Lower Implied Volatility

Options on the S&P 500 (SPX) are currently pricing in a potential movement of +/- 1.85% on Election Day, down from last month’s higher implied movement of approximately +/- 2.8%. The decrease indicates that the market expects a slightly more contained reaction than it did a month ago. According to Citi S&T, a 2% move would be more reflective of fair value under current conditions.

This cooling of implied volatility could suggest either a reduced expectation of market-altering news or a sentiment shift toward less unpredictability in the outcomes surrounding Election Day.

Comparing Implied Moves Across Key Assets

Beyond the SPX, implied moves differ across other major assets, each presenting unique volatility expectations:

• Russell 2000 (IMW): Implied move of +/- 2.9%
• Treasuries (TLT): Implied move of +/- 2.2%
• Gold (GLD): Implied move of +/- 1.8%
• China Large-Cap ETF (FXI): Implied move of +/- 3.9%

These figures highlight a broad expectation for significant moves, particularly in assets tied to small caps (IMW) and China (FXI). Treasuries, gold, and the S&P 500, while less volatile in relative terms, still reflect elevated levels of uncertainty that tend to be associated with election-related shifts and policy implications.

High Implied Volatility with a Strong Premium on Put Hedges

Generally, implied volatility remains high across the board, sitting at a sizable gap compared to realized volatility. This discrepancy underscores how the market perceives an asymmetric risk going into Election Day—investors are willing to pay a premium for protection against potential downside shocks. Notably, put options, which serve as hedges against declines, are seeing strong premiums, indicating substantial demand for downside protection.

What This Means for Investors

With high implied volatility and rich pricing on puts, the options market is signaling that investors are taking precautionary positions against downside risks. For those considering hedging, this environment suggests a higher cost to insure against adverse movements. However, for options sellers, elevated premiums could present an attractive opportunity if market moves end up being more subdued than implied.

While Election Day is expected to bring movement across major markets, the extent of volatility has tempered slightly over the past month. Citi’s assessment points to a more balanced view on the S&P 500’s likely range, although volatility remains high with significant interest in protective strategies. As we head into Election Day, all eyes will remain on the markets, with investors weighing both the cost and necessity of hedges amidst a time of heightened uncertainty.