The question traders are asking themselves right now is if it’s time to concede long vol trades for a while and pack it in, buy some XIV and call it a summer.
(Damn, XIV is gone. Ok, SVXY then. Ugh, it’s been neutered to .5x return of XIV. Ok, short some VXX and hit the links. What, why can’t I get a borrow? What the hell happened in February anyway?)
Let’s look at the last 5 years of summer volatility, at-the-money:
VOLI is the Voldex at-the-money implied volatility index. Basically, it’s a vix that measures 30-day implied volatility on options that are so close to price that they aren’t being used as insurance for tail risk events. For this reason, to me it can be more representative of the volatility environment. Short it and you can get ruined. Long it and you may bleed to death… but you could at any moment be lighting a cigar over tartare and delmonico while splurging on single malt islay.
Back to reality. What is clear is that in the last 5 years, these red-lined areas (Late May to late August) are when volatility has been most likely to hit its nadir for the year. 2017 was a freak show, we all know that now. But spikes in at-the-money vol could easily hit serious levels, and these are low compared to the vix. The most likely time for volatility to absolutely crater is a week or so in front of July 4th, when the double whammy of the holiday and expectations for non-correlated market moves due to earnings weigh heavily.
So don’t mail it in for the summer. June, July and especially August frequently saw real vol spikes near volatility low points for the year. Keep your phone in the cart.
