How Volatile is this Election?

Leverage (Finally) Builds Up

Ahead of the U.S. presidential election we have seen clear evidence of increasing leveraged positioning in both futures and perpetual markets. Futures implied yields have lifted at the front end of the term structure while remaining low for longer dated expiries, and funding rates have been stubbornly positive, underscoring the shift in sentiment as traders prepare for potential election-driven upside spot movements.

We have seen these metrics of bullish positioning build up from mid-September, despite the event carrying a bullish sentiment long before that. This was likely due to traders looking to gain long exposure to BTC (and ETH) ahead of the election at lower spot price entry points, but without paying the funding costs for holding the contract over the pre-election period for which they hold no bullish view.

Interestingly, despite a wave of new positions opened during the early October rally, spot prices have not managed to breakout beyond the top of its 6-month range. However, subsequent selloffs in spot have not resulted in a closure of those positions, suggesting a firm underlying sentiment surrounding the upcoming election period and resilient positioning.

A similar pattern has emerged in the options market, where implied volatility has risen at short-dated tenors – not only to match the levels at post-election expiries, but to fully invert the term structure.

We’re now seeing traders express demand for options with a Nov 8 expiry – the first available post-election – causing implied volatility around this date to lift notably above that of longer-dated options. As we are seeing in futures and perp markets, we expect that this indicates that traders have begun to scale into election-driven positioning (having avoided the theta decay that would have come with taking the same positions several months before) which may have been exacerbated by the closure of short volatility positions.

Event Risk Positioning Has its Own Risks

We last saw a clear build-up of leverage within derivatives markets ahead of the January ETF launch. Just as we have seen ahead of the election in early November, in the months before the approval and launch of the BTC ETFs we witnessed a distinct kink develop along the term structure at the tenor corresponding to the known event risk.

As the event approached, this kink moved closer along the term structure and ultimately resulted in an inverted term structure close to the event. In addition to implied volatility, perp swaps funding rates traded positive, and futures implied yields climbed higher, each reflecting building bullish leveraged positions. However, days before the event, this leverage and build-up sentiment unravelled quickly and options’ volatility dropped significantly.

Despite these parallels in the data, this time around there are notable differences compared to the ETF case. While the kink in the term structure was present throughout, outright volatility levels had trended downward in the run-up to the election and have only recently rallied to the point of inversion.

The later inversion this time around is due to the front-end of the term structure rallying slightly later. That can be seen from the chart above, which compares the ATM implied volatility level at a 7-day tenor ahead of the election to its level at the same time before the ETF decision date in January. The levels are strikingly similar. However, the 7-day vol ahead of the US election has rallied with an apparent lag of 2 days.

The 180-day tenor vol has not yet rallied at all ahead of the election, in contrast to its behaviour ahead of the ETF event. Then, the 180D tenor followed the rest of the term structure higher as volatility rallied, peaking a day before the event. The net result is a similarly inverted term structure that is 6-10 vol points lower across the term structure heading into the election.

The build-up of leveraged positions ahead of the U.S. presidential election mirrors previous market behaviours – but with slight differences in outright volatility expectations. Traders are aggressively positioning for potential election-driven movements, yet pricing a lower level of volatility across the board compared to the ETF launch.