While the market's immediate attention this week is fixed on Nvidia's upcoming earnings report and Federal Reserve Chair Kevin Warsh's speech at Jackson Hole, derivatives traders are already positioning for a potential surge in volatility around the November US midterm elections. Volatility traders closely monitoring the futures market tied to the Cboe Volatility Index (VIX) point to escalating demand for protection against potential swings in the S&P 500 in the lead-up to the vote.

VIX futures expiring in September are currently trading around 17.4, but the October contract has climbed to 19, with November futures pushing even higher to 19.7. Matthew Thompson, co-portfolio manager at Little Harbor Advisors, noted in an interview that the upcoming election cycle is beginning to exert its influence on the VIX term structure. "You can already see this bulge in the VIX futures curve," he said, highlighting the market's anticipation of political risk.

Expectations for further upside in the VIX before the midterms are building, and it's unsurprising that traders are bracing for stock market turbulence around the vote. Historically, political uncertainty during midterm election years has frequently correlated with heightened market volatility. According to a study by analysts at Cboe Global Markets Inc., actual volatility in midterm election years has been higher than the preceding year 80% of the time since 1945, averaging an increase of 3.5 volatility points. In years when the same political party controls both the White House and Congress, that average jump widens to 6 percentage points.

Cboe data also reveals that the S&P 500 has tended to underperform during midterm election years, with an average return of just 4% and a median of only 1%. This year's stakes could be even higher than usual, as bipartisan backlash against planned AI data center construction is fueling increasingly strong voter pushback, with those spending plans being a key driver of this year's stock market rally. Furthermore, the focus extends beyond congressional races alone.

A team of strategists at Bank of America, led by Michael Hartnett, is paying particularly close attention to Texas Governor Greg Abbott's re-election bid. They have warned that if Democrats were to gain control of the Senate and the Texas governorship, the stock market could potentially drop more than 10% next year, meeting the conventional definition of a "correction".

Cboe's primary exchange has recently launched daily S&P 500 options expiring on election day and the following day, allowing traders and strategists to begin monitoring market expectations for post-election volatility. Currently, these options are pricing in an implied single-day move of approximately 1.4% for the S&P 500 on November 4th, the day after the election. Mandy Xu, head of derivatives market intelligence at Cboe, stated that with these options now listed, an increasing number of election-specific trades are expected to emerge.

Additionally, there is market speculation that President Trump and Treasury Secretary Bessent might attempt to keep the stock market performing strongly ahead of the election. Brent Kochuba, co-founder of data provider SpotGamma, suggested it's plausible that Trump and Bessent will push to keep things moving forward, adding that a signal from Fed Chair Warsh indicating support for the Treasury Secretary's efforts to stabilize the bond market could be enough to send a risk-on signal to investors. "Don't bet against Bessent and Trump," he advised.

Of course, the rise in October VIX futures could also be attributed to other factors, including the typical seasonal uptick in US stock market volatility during the autumn months. Kochuba acknowledged that while there is clearly a bulge, the VIX term structure also has a seasonal component.

Regardless of the cause of this "bulge" in the VIX curve, options traders point out that this is currently a favorable time to purchase cheap stock market volatility protection. The spot VIX index closed Monday at 15.8, well below its historical average of 19.4. Kochuba emphasized that insurance is currently very inexpensive right now, noting that for those holding stocks and looking to hedge, it's the opportune moment to own options.