On Oct. 25, Brazil reelected Lula.
The next day, Brazilian stocks fell nearly 14%, their worst session since March 2020.
The result didn’t surprise the country. It surprised the fund managers who had all bet on the other guy.
Tomorrow it’s our turn.
The betting markets give Democrats about a 93% chance of taking the House, and Pollsmax has them at 51 Senate seats. Everybody’s leaning the same way.
And the options market is pricing about a 1.4% move through Wednesday.
That’s less than half the move I’m expecting.
I’ve been saying the S&P can end up 3% or 4% away from here, up or down, within about a week.
Right now I’ll show you why I think the options market has this vote priced wrong, and the $350 billion that decides whether your index fund feels it.
A $10.40 Straddle Says Nothing Happens Wednesday
Pollsmax’s forecast has Democrats winning 231 House seats, and Kalshi traders put their Senate odds at about 71%. That would be a big change in Washington. You’d think the options market would be paying up for it, and it sort of isn’t.
Look at the straddle, a call and a put at the same strike bought together. What it costs is about how far the market expects the stock to move.
Monday afternoon, with SPY around $754, the at-the-money straddle (the one struck right at the current price) expiring Wednesday cost about $10.40. That’s roughly a 1.4% move through the day after the vote, and Thursday’s only prices about 1.6%.
History is on the side of a quiet vote.
On average, the VIX, Wall Street’s fear gauge, falls about 7% from two days before a midterm to three days after, according to the St. Louis Fed.
Goldman Sachs doesn’t expect this midterm to be a big source of volatility either.
My read is a little different.
Last week, the VIX futures curve, the prices traders pay for protection over the next few months, went flat, with November climbing, because you had the Fed, earnings, the Anthropic IPO and the election all landing in the same few weeks. On Friday, the S&P fell 1.8% in a single day.
VIX looks ahead, and right now you’ve got a lot of business that has to get settled. You know the last scene in “The Godfather”? We settle all the family business.
The election will be over and earnings will be out, and I’m pretty sure Anthropic goes public sometime in the next few weeks. A lot of these items are going to come off the ledger, and they’ve been driving a lot of the volatility. I think the move comes first, and the calm comes after.
$350 Billion Rides On Who Wins The House
Most of what people worry about for tomorrow doesn’t change with Congress at all. Tariffs, chip exports and drug prices run through the executive branch, and the president keeps his veto until January 2029.
What the vote does decide is whether a second reconciliation bill, a budget bill that can pass with a simple majority, happens in 2027. That bill carries roughly $350 billion of next year’s defense money. If Republicans lose the House, it’s gone.
Money that size moves bonds, and bonds move the Fed and your index fund. A 1.4% straddle isn’t pricing any of that.
See My Election Day Trade Before The Polls Close
Tomorrow at 10 AM ET is Day 2 of Midterm Money Live, and the theme is finding where the crowd leaned too far. You’ll see:
- Why I think the S&P moves 3% to 4% within about a week when the straddles are pricing less than 2%, and how I’m set up to get paid whichever way it breaks
- Which U.S. trades Tim Colby thinks look as crowded as Brazil’s did before the runoff, and where your money is exposed if the consensus is wrong
- The one market most index-fund investors forget to check after a midterm, and why it matters more this time
- Which patterns after past midterms held up, which broke, and the one Garrett Baldwin is counting on this time
It’s free, and when you register, Garrett sends you his new report, Paid Either Way, right away.
Show Me Where The Crowd Leaned Too Far
Andrew Giovinazzi