Editor's Note

Volatility fell sharply after the midterms, and short long-dated options lifted the account 36.77%

On Wednesday stocks rallied after the midterm elections, in which Democrats won control of both chambers of Congress. The S&P 500 rose 1.58% to 7,688.62 and the equal-weight S&P 500 (RSP) 1.86%: unlike on Tuesday, the advance was broad. QQQ gained 0.97% to 691.95 and the Nasdaq-100 0.91%. Within technology the moves diverged. Microsoft rose 6.68%, Amazon 6.12%, Apple 5.31% and Alphabet 3.18%. Chipmakers and data-center operators fell on concerns about tighter rules for data-center construction: Nvidia lost 3.17%, Broadcom 2.00% and the Philadelphia Semiconductor Index 3.1%. The ISM services index for October eased to 54.5 from 54.9, slightly below expectations. Oil fell sharply, with Brent moving toward a two-month low. The 2-year Treasury yield fell to 4.58% and the 10-year to 4.90%.

With the elections behind the market, volatility fell sharply. VIX dropped 4.22 points to 16.61 and VXN 5.45 points to 25.08; 30-day QQQ implied volatility (own calculations) fell from 28.22% to 22.80%. Puts cheapened more than calls: 25-delta puts lost 5.86 volatility points to 25.28%, and 25-delta calls 4.39 points to 19.75%. The 25-delta skew narrowed to 5.53 from 7.00 points, and the skew index to 24.3 from 24.8. The front of the curve normalized: VIX9D/VIX fell to 0.915 from 1.054 and VIX/VIX3M to 0.884 from 0.979. On the Convexa scale the regime moved from Tense to Normal, and the event modifier was removed. The negative-gamma modifier remained: QQQ closed 2.28% below the model zero-gamma level of 708.11. The cheap-premium modifier was added, as 30-day implied volatility fell below 20-day realized volatility (23.25%).

The account closed the session 36.77% higher, against a 1.65% gain in SPY. The largest gain came from the short long-dated puts, which lost value as implied volatility fell sharply and QQQ rose. The short long-dated calls added less: for them, the fall in volatility outweighed the rise in the market. Part of the gain was given back by protection: the long lower-wing puts and upper-wing calls, the 9 November options and the short-dated wings in the 4 November expiry, which expired worthless. The size of the result on a moderate QQQ move reflects the account's high sensitivity to implied volatility, which fell by more than five points in one session. Week-to-date and November-to-date, the result was +16.40%, against +1.47% for SPY. Since the start of the public record on 5 August the result was +22.51%, against −0.36% for SPY.

At the close the weekly QQQ straddle priced a move of ±1.67% to the Friday 6 November expiry (range 680.40–703.50), against ±3.02% a session earlier. QQQ closed 1.67% above its 200-day average (680.56). Ahead were productivity and costs for the third quarter and weekly jobless claims on 5 November at 08:30 ET, and the October employment report on 6 November at 08:30 ET, the day of the weekly QQQ options expiry.