As the U.S. presidential election approaches, investors are bracing for increased market volatility. The uncertainty surrounding potential policy changes—on everything from taxes to foreign policy— can cause investors to adjust their portfolios in anticipation of various outcomes. This can lead to sharp market swings, both before and after election day. However, understanding historical market patterns can provide valuable insights on what investors can expect and how to prepare (though past performance does not guarantee future results).
The uncertainty surrounding election outcomes often leads to heightened market volatility swings in the days and weeks leading up to Election Day. In fact, according to Stifel Financial Corp., the average monthly Cboe Volatility Index (VIX) during presidential election years between 1990 and 2023 was 20.7, compared to 19.4 in non-election years. Equity markets, in particular, tend to price in higher volatility for October. CFRA Research reported that while election years see an average monthly gain of over 1%, October stands out as the most volatile month, with volatility about 35% higher than the average of the other 11 months.1
This surge is often driven by traders hedging their portfolios with options, anticipating potential market-moving events. For example, in both 2016 and 2020, the VIX saw significant spikes before Election Day, and dropped shortly after in the months following as the uncertainty eased.
Leveraging Volatility for Income
During periods of market uncertainty, options-based strategies, such as covered calls, offer a flexible tool for managing risk while generating income. Covered calls involve selling call options on stocks already owned, allowing investors to receive a premium upfront. This premium can help offset potential losses during volatile periods, providing a cushion against downside risks.
Election-year volatility presents an ideal environment for these kinds of strategies. As volatility spikes, the premiums on options increase, allowing investors to enhance their income potential. For example, in the weeks leading up to the 2020 election, the VIX climbed to 40 in late October from 24 a few weeks prior. We could very well see similar swings this election cycle, which can allow investors to capture larger premiums and help to dampen the risk of major market losses.
Conclusion
As the election nears, rising volatility doesn’t have to mean bracing for losses. With a strategic approach, options-based strategies like covered calls can help investors turn market uncertainty into a potential income opportunity. By capturing elevated premiums, investors can offset potential downsides and add resilience to their portfolios. Guided by historical patterns, investors who prepare with the right options strategies are better protected—and positioned to benefit—from the volatility ahead.
Disclosure
Options trading involves risks and may not be suitable for all investors. Options trading requires a thorough understanding of complex financial instruments and strategies, including market volatility, price fluctuations, time decay, and other factors that can affect an option’s value. Investors should carefully consider their financial situation, investment experience, and risk tolerance before engaging in options trading. Options trading can result in losses, including loss of principal, and may limit gains in rising markets.
Election-year volatility can present opportunities but also carries increased risks. Options strategies like covered calls may help in managing risk and pursuing income, but these strategies are not suitable for all investors. Past performance is not indicative of future results.
1 Historical data is provided solely for illustrative purposes and does not predict future market outcomes.
