Yesterday, I saw Andrew Thrasher on the TD Ameritrade network talking about VIX Index seasonality and the current level of the VIX Index. That got me thinking about summertime and the VIX Index (because I think alot about the VIX Index). It has been a while since I took a look at which months of the year tend to have higher and lower volatiltiy expectations than others. And since I’d never looked at the summer months versus the rest of the year, I got to crunching some numbers.
I ran a couple of quick tests looking at the VIX Index. First I took a look at the average VIX Index close by month from 1990 – 2017. The table below shows the ranking of each month’s VIX Index averages.
I added some color to the table to divide the rankings by quartiles. It appears that Andrew may be on to something here. The three lowest average months for the VIX Index are the fair weather months of May, June, and July. August itself has been witness to a couple of volatility events (2011 and 2015) that put it in the middle of the pack, but also remember here that the VIX Index is a measure of expected volatility, and August directly precedes those months that have been associated with the highest average monthly volatility, and some notably extreme market events. In fact, September and October are at top of the pack as far as average VIX Index pricing goes.
Another look at VIX Index averages compares the average close for the months of June through August versus the rest of the year. I also included the average close for the VIX Index for the period of 1990 to 2017.
As observed, the summer months’ average is lower than that for the balance of the year, and the difference between the two periods is actually over a full point. Additionally, the long term average (as of the end of 2017) is 19.37, a number that has been slowing trending lower over the past few years.
So these numbers do back up the thinking that summer is, generally, a period of lower volatiltiy expectations. This does not mean that the VIX Index does not periodically move higher during the summer months. It’s just that the summer months typically have lower volatility expectations when compared to the rest of the year, and particularly to the fall months. When we consider market moving events that may happen in the fall, such as elections, and the fact that this period follows the national vacation season when so many businesses can get quieter due to holiday absences, it isn’t really surprising to see how the VIX Index may reflect this reality. As the barometer goes higher with the sunny months and warm weather, the VIX Index, as with its other inverse relationship versus the S&P 500, can get quiet.
Taking this a step further I decided to look at VIX futures and VIX options activity relative to the summer months. Standard June VIX futures and VIX options expire next week so there has been some rolling of positions from June to July this week. Looking at the open interest for the next six standard series shows something pretty interesting. The table below is the open interest for the standard VIX option series as of June 13th.
The largest open interest figures are in June and July. However, over a million contracts in the August series is notable with this much time to expiration. What stands out, and highlighted in red, is the ratio of call to put open interest. All series have more call open interest than put open interest, but the proportion of open calls to puts in August is definitely an outlier. The same may be said for the September series (also in red). The activity for both August and September leans heavily toward the call side. Although calls can be used to construct a trade that is bullish or bearish on the underlying market, many recent trades appear to have bullish VIX slant. One thought is the current low levels for the VIX Index and the associated futures is bringing some of the volatility buyers into the market to get some long volatility exposure.