The stock market’s calm is cracking. Here’s how to prepare for an August shock.
Investors used to think of August as a dull month for the market. That is not really true. July is the dull month; beginning in August, volatility increases and generally rises into October.
This is a seasonal pattern that is verifiable from the accompanying chart of “seasonal VIX,” going back to 1989. Look at the chart below: Early in the year, there is often a volatility increase. It was recently most prominent in March 2020 and April 2025, and it is noted in the chart by VIX VIX rising into point “A” in mid-March, using all the years in question.
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Then volatility begins to lag, as the market generally rallies, or is at least complacent, into July. That brings the composite VIX chart down to point “B” — its low for the year. We are there now.
Then it’s August — often a volatile month in terms of both realized and unrealized volatility. The market often experiences turmoil into October, and VIX rises with it. October is often a month of severe declines, but is also known as the “bear killer” because the market has bottomed in October many times as well — halting those severe declines. (That is point “C” on the chart.) From there, VIX declines into year-end and the market will often rally. Then the cycle begins again.
Not every year fits this exact pattern, of course, but the general flow is as shown in the chart. But all too often, VIX rises in August and catches traders unprepared.
Trading season
Identifying the position one would want to take — being long volatility — is much easier than implementing it. There are nuances to VIX futures and options, and their corresponding ETFs and ETNs, that many traders do not fully understand.
For example, an options trader might think it’s a good idea to buy October expirations now to capture this rise in volatility. But the rising volatility could occur before October — maybe in early August, like what happened in 2024. In that instance, the October volatility purchase might make a little money, but nothing like a volatility product expiring in August would.
To account for that possibility, a trader’s best strategy is to buy short-term volatility and roll it over until an explosion occurs. Without getting too complicated into how volatility is calculated, consider this scenario: You’re a money manager and the stock market begins to implode in August. You need to buy S&P 500 SPX puts — and fast. What are you going to buy? October puts? I don’t think so. You’re going to buy August puts, because they cost the least in dollar terms.
When the market is plunging, you don’t care about buying the lowest implied volatility. You want some immediate protection for the least cost.
This type of action on a marketwide basis forces near-term VIX futures higher faster than longer-term futures. The profit to a volatility holder of August-expiration VIX products is far greater than holding October-expiration futures. In what might be the greatest volatility explosion of all time — September and October of 2008 — September/October VIX products that year rose about 600%. Those expiring in February 2009 rose about 10%.
Volatility ETFs and ETNs don’t get around this problem, because when you look under the hood, they own VIX futures at the core of their position. Concentrate in offerings that own futures expiring in the next two months or so, as they can benefit from the near-term action in VIX (exchange-traded UVIX UVIX and VXX VXX are two examples). Don’t buy intermediate-term ETFs and ETNs like VIXM VIXM; they own expirations that are too distant.
You’re better off buying VIX options (or options on the ETFs) even though they are really options on the futures. Even the Cboe options, which settle for cash on their last day, are still options on the VIX futures until the day the options expire. VIX futures can lose dramatically if VIX is declining and their time value premium dissipates. With an option purchase, you know what you can lose.
Moreover, this is one case to buy out-of-the-money options, because when VIX gets rolling to the upside, it can really move. So, for example, buy options that are 33% out of the money, based on the price of the near-term VIX futures. You’re not in this purchase to grind out a small gain with a minor move — you want a big gain on a monster move in VIX.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of “Options as a Strategic Investment.” www.optionstrategist.com
©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.
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