Schaeffer's Outside the Box Blog
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A belated Welcome Autumn to everyone.

After a summer of harping on how ugly the CBOE Market Volatility Index (VIX) can get in the heat, how about we take a quick look at VIX in the fall?

We’ve come to accept September and October market implosions as somewhat of givens. And, indeed, they do happen. For instance, 2008 saw the collapse of Lehman Brothers and a VIX surge from 20ish in early August to as high as 96 in mid-October. In 2011, we saw a VIX pop that never quite hit those extremes, but was equally impressive by other metrics. VIX shot up from 15 in late June to 48 in early August, and then returned into the high 40’s in early October. On Aug. 8, 2011, VIX closed 70% above its 10-day simple moving average -- a record divergence and good demonstration of the speed of the lift.

Of course, you can make the case that the Fall VIX strength last year was really just the last vestiges of the summer surge. And you would be correct. That’s not that uncommon a pattern. My book only includes pre-2008 VIX data, but the story has not changed all that much since then.

From 1991 to 2008, the “mean” VIX reading did indeed spike in autumn. The October cycle saw the highest VIX mean of the year, at 20.62, followed by September (20.44) and November (20.38). The typical fall day, though, did not see quite that kind of premium, as median September VIX at 17.99 was virtually identical to median August VIX of 17.94.

And realized volatility surprises are just as likely to occur in August as they are after Labor Day. We all remember last year’s pop, but there have been other August events: Big Ben’s surprise rate cut on expiration day in 2007, a market melt in August 2002, and the Russia meltdown in 1998, to name a few.

Throw it all together, it suggests a couple of things. Fall is not a bad time to own options in the sense that it's very unlikely that we see much of a VIX drop, especially given that we’re already pretty low to begin with. Whether we have a surprise coming up or not, no one’s selling options aggressively here. But that’s not to say this is a good time to own options in general. I looked at mean and median volatility by cycle relative to the realized volatility that we only could calculate in hindsight. And by that metric, September turned into the second worst cycle of the year to own, after December.

Disclaimer: The views represented on this blog are those of the individual author's only, and do not necessarily represent the views of Schaeffer's Investment Research.


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