The VIX and the Summer Doldrums

CBOE Market Volatility Index (INDEXCBOE:VIX) is a world-renowned measure of implied volatility which has seen several gains in the past few weeks. However, with the summer quickly approaching, it could get ugly soon. An early signal of trouble was seen on Wednesday when the markets were the most volatile we have seen all year and the VIX was barely affected. The S&P 500 fluctuated from a record midday high of 1,687.18 to 1655.35, a negative 0.38% at the close. The VIX, which is supposed to a signal of volatility, only made a modest gain of 3.37%. This could be a signal that the VIX is finally stabilizing and will soon see a decline.

Summer has almost always seen a typical slump for volatility. It would seem that large hedge fund managers expect it to be a quite summer and may have already started renting out houses in the summer. ConvergeEx said that the market is “simply white hot.” Essentially what this indicates is that we’re in for a slow summer since hedge fund managers would not dish out so much money if the summer was going to be volatile.

There have already been signs of what is to come. Notably, the VIX is down 40% compared to this time last year. Also, it has been bumping along the 52-week low and is in fact only up 10% from its annual low.

“…The July expiration cycle sees the lowest mean and median VIX of the year, and June sees the second lowest. And, in fact, the worst part of July is the first two or three weeks of the cycle,” reported Schaeffer’s Investment Research.

With the VIX at 14.07 and June VIX futures near 15.47, we looked to do the following:

Buy the VIX June 14 Puts for $.55 (commissions excluded)

Risk: $55 per 1 lot

Potential Reward: $1345 (with VIX at zero).

Breakeven: $13.45

Greeks of this trade:

Delta: Short

Gamma: Long

Theta: Short

Vega: Long

June expiration is Wednesday June 19th.