“Big Democratic Win. Big Market Sell-Off. What Flows, Narrative and the Economy Say Comes Next” — watch on Excess Returns.
Brent Kochuba, founder of SpotGamma, joined Jack Forehand on Excess Returns’ monthly Last Call to work through the election volatility premium, the hedges that rolled down rather than off, and the correlation spike that ended the rotation trade.
The S&P 500 rallied the morning after the midterm elections and then gave that back and more within a session, with the VIX traveling from roughly 16 to above 28 — on a percentage basis the third-largest one-day move since 1990. Brent Kochuba, founder of SpotGamma, joined Jack Forehand on Excess Returns to explain why the election volatility premium collapsed into that rally and why the risk sitting behind it has not cleared.
Wednesday’s Bounce Sold Expensive Volatility
The spread between the VIX and one-month realized volatility in the S&P 500 typically runs about three to four points, since the forward number carries a premium over what the index has actually delivered. Into the election that spread sat closer to five or six points, elevated but not extreme for a week also carrying an Apple report and an active war. The day after the election it contracted to roughly four points, and that compression — the volatility risk premium being monetized — looks like most of what drove the rally. By Thursday the same spread had blown out to 11 points, and briefly closer to 15.
The Weakest AI Names Skipped The Rally
The part of the market that sat out the bounce mattered more than the bounce itself. The neocloud names — CoreWeave, Nebius and IREN — fell about 5% on the rally day and roughly another 10% the next session, despite being oversold already and carrying the richest implied volatility in the complex. When the lowest-quality names in a theme cannot rally alongside everything else, whatever is ailing that theme likely has not been resolved.
Correlation Spiked And Rotation Stopped Working
Much of what held the index up through October was rotation inside equities, as money left technology for staples, financials, utilities and healthcare and kept the S&P 500 steadier than the Nasdaq. One-month correlation printed a very low reading into the election and then spiked on Thursday. Rising correlation means positions move together, so rotating among equities turned into rotating out of them, and relatively few hiding places were left.
Hedges Rolled Down Rather Than Off
Thursday’s spike paid holders of puts, and many did the sensible thing: sell protection into the extreme pricing, sell some VIX calls, and roll the exposure down to lower strikes. That relieves pressure near spot while shifting it lower, so the negative gamma now sits beneath the market rather than off the board. Roughly 4.5 million S&P index puts traded in a single session, a record, alongside about $52 billion of levered ETF selling, the largest since early June according to Morgan Stanley. With dealers short Vega around these levels, a slide from 7,400 toward 7,300 or 7,200 would likely pull more hedging selling into the move.
What Would Clear The Risk?
Expirations tend to remove this kind of exposure, because the put positions carrying the negative gamma stop existing. The calendar stacks Nvidia (NVDA) earnings on November 17, a possible Anthropic listing around the same dates, VIX expiration on the 18th and monthly OPEX on the 20th, ahead of a Thanksgiving week when relatively few traders want to carry expensive protection through the decay. Brent sees bounces before that cluster as chances to reduce exposure rather than add, with the post-OPEX window the more attractive one. Last November ran a similar shape, a drawdown into OPEX followed by a holiday-week rally that unwound a 9% decline.
We encourage traders to watch two things into mid-month: whether the gap between implied and realized volatility narrows back toward its usual three to four points, and whether one-month correlation eases enough for rotation inside equities to work again. A large capital event in AI credit could do that job faster than the calendar.
Brent Kochuba founded SpotGamma and co-hosts The OPEX Effect with Excess Returns. He was previously a portfolio manager at Seven North Capital Management, building options-based strategies, and a derivatives broker at Wolverine Execution, Credit Suisse and Bank of America.
Watch the full episode on Excess Returns.
Last Call runs monthly on Excess Returns.