Persistence of Volatility Timing

From The Daily Options Report by Adam Warner on the seasonal cycle of volatility.  It bottoms end of June beginning of July, then picks up in the summer for a peak in the fall.

For all the talk about “bottoming” the VIX, I would like to throw one little splash of cold water on it.

As per numbers I ran for my book, Options Volatility Trading: Strategies for Profiting from Market Swings(Amazon link) July cycle shows the lowest mean and median VIX readings. Early in the July cycle, really from June expiration into July 4th or so, is particularly bad, and in fact often is the low water mark of the year.

So with “cheap” options volatility already overpriced relative to realized volatility, and the last week of a cycle not a good time to buy options of the following cycle under any circumstance, I’d really refrain from “bottom fishing” July paper here. It will likely get cheaper in volatility terms.

Now none of this says anything about actual stock volatility this coming week. It’s expiration, anything can happen. I tend to think that if it’s non-volatile heading into expiration week, it stays that way. But you always have the chance of an event getting some names on the move. What it does say though is not to let a potential active day or two seduce you into buying July options. Treat it as a blip in volatility, not the start of a new trend up.

And none of this says anything about VIX futures, or VXX. Remember the VIX future just looks at a snapshot VIX reading for the day it expires. The pattern is ugly volatility early in the July cycle, but the VIX may very well rebound by the end of the cycle. Expect VIX July futures to keep a healthy premium to “cash”.