{"id":714,"date":"2026-10-15T07:47:00","date_gmt":"2026-10-15T14:47:00","guid":{"rendered":"https:\/\/quantcha.com\/news\/?p=714"},"modified":"2026-10-14T20:16:04","modified_gmt":"2026-10-15T03:16:04","slug":"are-prediction-markets-taming-election-uncertainty","status":"publish","type":"post","link":"https:\/\/quantcha.com\/news\/are-prediction-markets-taming-election-uncertainty\/","title":{"rendered":"Are Prediction Markets Taming Election Uncertainty?"},"content":{"rendered":"\n

SPX options are pricing this election night about like the last midterm.<\/em><\/p>\n\n\n\n

Last Friday, the CFTC proposed folding event contracts<\/a> into the definition of a swap. Chairman Michael Selig’s announcement summed up what they’re for in one sentence: “Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome of future events.”<\/p>\n\n\n\n

Two of those hold by design. A contract that pays on an outcome hedges anyone exposed to it, and speculators trading against each other are how its price gets set. The third deserves a closer look, because the public is getting plenty of information about the outcome of the midterms. Kalshi’s market on control of Congress has updated all year. The result that would change the most for markets is a Republican sweep, the only outcome that leaves one party running everything. It peaked at 27.5% in May, bottomed at 7.5% in late September, and closed Tuesday at 10.5%.<\/p>\n\n\n\n

Knowing the odds is useful. The CFTC’s June proposal<\/a>, which I wrote about at the time<\/a>, asks for more, though. It weighs whether a contract can “inform any economic, commercial or financial decisions.” For investors, a contract that informs decisions should leave less uncertainty for election night, and the best measure of uncertainty we have is what options charge for it.<\/p>\n\n\n\n

One night, priced on its own<\/h1>\n\n\n\n

Cboe did something really interesting with this year\u2019s midterm elections: it posted SPX expirations for Election Day and the day after, and it did it months in advance. It did something similar for the 2020 and 2024 presidential elections, but this is the first midterm to get the early listing.<\/p>\n\n\n\n

It serves two really useful purposes:<\/p>\n\n\n\n

    \n
  1. You can trade options for the day after the election, which gives you a really good way to hedge the outcome as it affects the market.<\/li>\n\n\n\n
  2. You can trade options that expire on Election Day itself, before any results are in. Paired with the day-after options, they isolate election night, both as a trade and as a read on how big a move the market expects.<\/li>\n<\/ol>\n\n\n\n
    \"\"
    The Election Day options settle before any results, and the day-after options settle after them. The difference between their prices is the price of election night.<\/em><\/figcaption><\/figure>\n\n\n\n

    As of Tuesday\u2019s close, the at-the-money straddles price election night at about a 0.8% move in either direction, against about 0.6% for an ordinary day nearby. Risk adds up across days in variance rather than in percent, and by that measure election night costs about 1.7 normal days.<\/p>\n\n\n\n

    With a Republican in the White House, the outcome that matters most for markets is whether one party ends up controlling everything. Since there\u2019s only about a 10% chance Republicans sweep the House and Senate, divided government is the base case at 90%, and the market should already be priced for it heading into the election. If the extra election-night risk is all about a sweep surprise, the options imply that surprise would move the S&P no more than about 2%, in whichever direction.<\/p>\n\n\n\n

    \"\"
    With divided government at about 90%, the S&P already sits close to that outcome. A sweep surprise would move it up to about 2%, and the options don’t say which way.<\/em><\/figcaption><\/figure>\n\n\n\n

    What taming would look like<\/p>\n\n\n\n

    At 10%, only a tenth of a sweep is in the price. If it happens, the rest arrives overnight, and no amount of good odds beforehand changes that. What a good information market can do is pull the uncertainty forward, so the index adjusts a little each time the odds move and less is left over for election night. If Kalshi were doing that for investors, I\u2019d expect the election-night premium to fade as the vote gets closer, especially with the sweep looking less likely. I\u2019d also expect it to come in lower than in comparable elections without these markets.<\/p>\n\n\n\n

    Spoiler alert: the premium went up as uncertainty dropped<\/h1>\n\n\n\n
    \"\"
    The election-night premium in SPX options against Kalshi’s Republican sweep probability, from mid-August through Tuesday.<\/em><\/figcaption><\/figure>\n\n\n\n

    Since late August the premium has climbed from about 1.3 normal days to 1.7. Over the same stretch the sweep slid from about 15% to about 10%. Uncertainty being pulled forward would have shrunk the premium. So would an options market keyed to the sweep, since a less likely sweep means less chance of the outcome that moves things.<\/p>\n\n\n\n

    Nothing in the odds explains the climb. The likeliest reason is that demand for election protection simply builds as the date gets closer, which has more to do with the calendar than the odds. I can’t prove that with the data I have, but either way the options market isn’t taking its cue from the sweep odds.<\/p>\n\n\n\n

    This midterm looks like the last one<\/h1>\n\n\n\n

    I ran the same measurement for every election since 2018 over its final four weeks, which is as far back as all five had the right expirations. The typical reading over that stretch was about 1.9 times a normal day in both 2018 and 2022. 2026 is at about 1.7 so far. Presidential years run hotter, at about 3.4 times in 2020 and 8.5 in 2024.<\/p>\n\n\n\n

    \"\"
    The election-night premium for each election since 2018, as a multiple of a normal day. 2018 and 2020 cover two days because SPX had no Tuesday expirations yet.<\/em><\/figcaption><\/figure>\n\n\n\n

    2022 is the closest comparison, since Kalshi had no congressional markets then. 2026 is running a little below both earlier midterms, which is the direction taming would point. The gap is small, though. 2022 alone slid from 2.2 to about 1.3 over its last two weeks, so I wouldn’t read much into a difference of 0.2. 2024 doesn’t settle anything either, since the stakes were far bigger, but the first election with Kalshi live also carried the biggest premium of the five. The premium seems to follow the stakes, and this year the stakes for the index look modest.<\/p>\n\n\n\n

    Do stocks follow the odds?<\/h1>\n\n\n\n

    I also tried the direct test. I pulled Kalshi’s hourly prices, lined them up with the 4 PM stock close, and compared 194 trading days of odds changes against SPY, six sector and small-cap ETFs measured against SPY, and long Treasuries. Nothing readable came out. The best estimate of a Republican sweep’s value to SPY is -4.9%, with a range from -20.3% to +10.6%, which is another way of saying daily data can’t tell a 2% effect from zero.<\/p>\n\n\n\n

    \"\"
    Each dot is one trading day. If stocks followed the sweep odds, the cloud would slope.<\/em><\/figcaption><\/figure>\n\n\n\n

    One result held up for about an afternoon, which in my experience is the typical shelf life of a significant result. Financials lagged the market when Democratic sweep odds rose, by enough to clear the usual statistical bar. Then I checked the dates. Three of the biggest odds days sat right around the Fed’s September 16 rate hike, its first in three years, and coverage at the time tied part of the odds shift to the U.S.-Iran war’s effect on fuel prices and rates. The same news was moving the odds and the banks, so the correlation mostly tells you about the news.<\/p>\n\n\n\n

    In defense of the markets<\/h1>\n\n\n\n

    To be fair, this measures one kind of decision, which is the way investors price risk in the S&P 500. A campaign, a utility, or an analyst covering health insurers could get plenty out of the same odds without any of it showing up here. The odds have also done what Selig described, publicly and all year. Polls and offshore books did a rougher version of that long before Kalshi, though, and 2022 got through election night with a similar premium and no congressional contracts at all.<\/p>\n\n\n\n

    My measurement has a limit too. The pair only covers the first night, and a close Senate race in a slow-counting state could push some risk later into the week. Right now the options price the Thursday and Friday after the election like ordinary days, even though Friday is when the monthly jobs report usually lands. The market expects to know what it needs by Wednesday’s close.<\/p>\n\n\n\n

    Where I land<\/h1>\n\n\n\n

    Selig’s list holds up. The contracts hedge, they set a price, and they tell the public who’s likely to win. For S&P 500 investors this year, I can’t find evidence that knowing the odds has taken any uncertainty off election night. The premium sits a little below recent midterms, well inside how much they moved, and it has risen while the sweep faded. Day to day, stocks don’t visibly track the odds.<\/p>\n\n\n\n

    I’ll be checking the result on November 4. In each of the last four elections the S&P moved more than the straddles priced, between 0.96 and 1.36 standard deviations against a typical 0.8. Four isn’t much of a sample, but it’s a streak worth watching. Going into November 3, are you watching the Kalshi odds, the SPX straddle, or both?<\/p>\n","protected":false},"excerpt":{"rendered":"

    SPX options are pricing this election night about like the last midterm. Last Friday, the CFTC proposed folding event contracts into the definition of a swap. Chairman Michael Selig’s announcement summed up what they’re for in one sentence: “Americans use event contracts to hedge risks, speculate, and provide the public with information about the outcome … Continue reading “Are Prediction Markets Taming Election Uncertainty?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":721,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[8],"tags":[],"_links":{"self":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/714"}],"collection":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/comments?post=714"}],"version-history":[{"count":1,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/714\/revisions"}],"predecessor-version":[{"id":720,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/posts\/714\/revisions\/720"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/media\/721"}],"wp:attachment":[{"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/media?parent=714"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/categories?post=714"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/quantcha.com\/news\/wp-json\/wp\/v2\/tags?post=714"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}