Indicator of the Week: The Bright Side to October Volatility Spikes

If history is our guide, volatility could jump in October before ultimately collapsing

Senior Quantitative Analyst
Oct 14, 2015 at 7:30 AM
facebook twitter linkedin


Historically, the month of October has brought with it some volatility. The two biggest monthly declines since the Great Depression were October 1987 -- on Black Monday, Oct. 19, 1987, the S&P 500 Index (SPX) fell more than 20% in a single day -- and October 2008. Below, I'll show that we are entering what is possibly a time of cyclic volatility.

Monthly Returns: Below are a couple tables summarizing monthly returns for the S&P 500 over the last 50 and 20 years. As you can see, October has the highest standard deviation of returns over each time frame. The good news is that over the past 20 years, October has been the third strongest month, going by average return, and second strongest according to median return.

151013IOTW1

Typical Year-To-Date Returns & Volatility: I thought this was an interesting chart; it shows typical year-to-date data over the past 50 years. Note that the typical return is on the left axis and the historical volatility is on the right axis. Notice also that the volatility spikes way up in October, tops out right around the start of November, and then collapses for the rest of the year. The SPX typical return chops up and down in October, bottoms on Oct. 27 (marked on the chart), and then shoots higher over the last two months.

151013IOTW2

The chart below shows the same data as the chart above, except it only shows data over the past 20 years. In other words, this one doesn’t contain the 20% single-day drop in 1987. October again shows a giant spike in market volatility, followed by a collapse in volatility. Again, the index shoots higher over the last part of the year, beginning Oct. 9. It seems that if we can avoid those big outlier moves like in 1987 and 2008, there's a good chance we see smooth sailing and gains over the next couple of months.


151013IOTW3

 

If you are not making money with options, you aren’t buying options like this…

There is no options strategy that more perfectly approaches trading the fastest moving and most volatile stocks available in the marketplace than this one. In fact, there is no strategy that better utilizes put options for optimal returns and a real trading edge over other traders in the exact same market. New options traders fail out at an incredible rate without proper trade research, execution timing, and option picking. Capitalize on Schaeffer’s 100+ years of options trading excellence with the most coveted product launch in company history. Don't waste another second... join us right now before the next round of trades are released!

Schaeffer's Investment Research Stock Pick Report
 


 


 
Special Offers from Schaeffer's Trading Partners