A veteran derivatives trader is warning that markets are dangerously overlooking the potential for political turmoil stemming from the US midterm elections, and that current low volatility offers a rare window to secure portfolio protection at bargain prices.
Kevin Muir, a former institutional derivatives trader who writes the market column The MacroTourist, argues that the probability of a contested election result or broader political instability is being significantly underestimated. In his view, options pricing currently fails to account for this tail risk.
As markets calmed through August, the implied volatility on S&P 500 put options has retreated noticeably from July's highs. Muir suggests that the quieter the market, the cheaper the cost of protection. Once election risks become properly priced into assets, volatility could spike rapidly, making hedging considerably more expensive.
His advice is straightforward: now is the time to begin gradually building portfolio protection. "The best time to buy insurance is when nobody wants to buy it," he notes.
Contested election risk underpriced, political upheaval could rattle markets
Muir's core argument rests on the current polling landscape. Surveys generally show Trump's support slipping, with Democrats poised to reclaim the House of Representatives while Republicans are expected to retain control of the Senate.
But Muir contends that what markets truly overlook isn't the election outcome itself, but the political and legal disputes that could follow a challenge to those results. If the final tally goes against Trump, he believes the probability of the former president mounting an aggressive response and contesting results in specific districts is being grossly underpriced by markets.
In such a scenario, Trump could pursue legal challenges in every "contested" district, delaying certification proceedings and triggering a wave of media coverage centered on questions of "what happens next" and allegations of a "stolen election."
Muir argues that this political uncertainty could ultimately transmit into financial markets and drive volatility sharply higher. For markets, the greatest danger may not be which side wins, but rather the prolonged inability to confirm results and the persistent uncertainty that follows.
Volatility at annual lows makes protection affordable
Current options pricing is offering investors a relatively inexpensive hedging window.
With markets broadly calm through August, the VIX has fallen to yearly lows, and implied volatility on S&P 500 put options has declined in tandem. November contracts are now pricing implied volatility below 15%, while December contracts sit at approximately 14%. As a key input for options pricing, implied volatility in the 14-15% range suggests markets expect the S&P 500 to move an average of roughly 0.875% per day — historically low territory.
Muir believes this low-volatility environment is ideal for gradually building portfolio protection. Once markets begin repricing political risk, volatility tends to escalate very quickly; by the time risk becomes a dominant trading theme, hedging costs may have already risen substantially.
Seasonal headwinds and AI exuberance add further pressure
Beyond election risk, seasonal factors could amplify market turbulence. Muir points to research from Citadel Securities and Barclays strategists showing that September and October have historically been the two worst months for risk-adjusted S&P 500 returns, with the VIX typically trending higher during this stretch.
Meanwhile, the persistent enthusiasm surrounding AI trades also keeps Muir cautious. He cites Nvidia's acquisition of Hugging Face as evidence that optimism in the AI trade remains robust, even as certain indicators such as widening credit spreads flash warning signals.
Still, in Muir's assessment, none of these risks warrant as much concern as a disorderly midterm outcome. When markets are paying virtually no premium for this tail risk, low volatility itself represents a hedging window worth exploiting.