Potential midterm-election chaos could roil markets. Here's one trader's play.

By Jules Rimmer

The time to buy insurance is when no one wants to buy insurance, says trader Kevin Muir

Donald Trump in the Rose Garden late Wednesday.

One trader thinks stock-market volatility will spike in the run-up to, and the aftermath of, the U.S. midterm election on Nov. 3. Yet buying portfolio protection through put options on the S&P 500 - derivative contracts that increase in value when the index falls - has been getting cheaper.

Kevin Muir is a former institutional equity-derivatives trader and author of a closely followed Substack column on markets called the MacroTourist, whose latest installment, published Friday, addresses the likelihood of a disputed or chaotic election outcome. Muir contends that risk is being understated. The political and governmental turbulence this scenario could generate is, in his view, mispriced by options markets.

Implied moves for midterm elections are more in line with pre-2018 levels.

Muir's thesis is based on the general impression among pollsters that President Donald Trump's popularity is flagging and that the Democrats will take control of the House as the Republicans retain control in the Senate. However, Trump will likely contest any unfavorable election outcome fiercely, Muir said. This is a possibility that Trump himself has flagged in set-piece speeches.

Muir's fears include Trump's funding court challenges in every "problematic" district, fueling confusion and delay. That would lead to a "whirlwind" of "what-happens-now?" and "stolen election" headlines, Muir says. This will generate much higher volatility in financial markets, which, as traders often remind us, don't like uncertainty.

Washington Watch (July 2026): Why Trump's speech on U.S. elections may have been bad for markets

Option markets have been making insurance cheaper as volatility - best measured by the Cboe Volatility Index VIX, known as Wall Street's "fear gauge" - is sitting at its low for the year after a relatively calm period through August, notes Muir.

Muir said that implied volatility (the market's best guess of how much the S&P 500 SPX will fluctuate at that time) of December S&P 500 put options was trading around 16% in July, while today it is at 14%. Implied volatility in put options for the S&P 500 in November has also tumbled significantly, from 17.5% to below 15%. (As a general rule of thumb, an implied volatility of 16% suggests the market will move on average around 1% daily.)

This is why Muir says that "the market is vastly underestimating the dangers lurking under the covers."

Moreover, Muir cites research from strategists at Citadel Securities and Barclays showing that, on a seasonal basis, September and October are typically the worst months for risk-adjusted returns in the S&P 500. The Cboe volatility gauge has also tended to rise over these two months. He also expresses concerns about overexuberance in the AI sector - as evidenced by (NVDA) Nvidia's acquisition of Hugging Face, widening credit spreads and several other factors - but it's the potential electoral dysfunction that troubles him most.

Muir advises investors, "It's time to pick away at buying portfolio protection" because, when volatility is repriced quickly, the moves can be explosive and too fast to act on. When insurance is this cheap, it's "a chip shot" to take advantage.

Brett Arends: This presidential-election bet offers 'free money'

-Jules Rimmer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-04-26 0840ET