August stock market volatility warning points to VIX jump risk
Lawrence G. McMillan says VIX history since 1989 shows July calm can give way to August turbulence and a fall volatility surge.
By Frankie Delgado · News Reporter
3 min read
August stock market volatility is back on the radar after MarketWatch columnist Lawrence G. McMillan warned that the market’s quiet July setup has often been followed by a rougher stretch for traders.
In a July 23 opinion column, McMillan wrote that investors who treat August as a sleepy month may be looking at the calendar the wrong way. He said July is more often the low-volatility month, while turbulence tends to build from August into October.
McMillan based the view on a seasonal VIX composite going back to 1989. In his description of the chart, volatility often rises early in the year, fades as stocks rally or investors grow more relaxed into July, then climbs again as summer turns toward fall.
Why does stock market volatility rise in August?
McMillan said the seasonal pattern shows VIX typically reaching a low around July before volatility picks up in August. In his analysis, that move can continue into October, a month he said has often seen sharp market drops but has also marked market bottoms often enough to earn the nickname “bear killer.”
VIX, in McMillan’s discussion, is the volatility gauge tied to the products traders use to bet on or protect against market swings. He cautioned that the seasonal pattern does not fit every year, but said August VIX jumps have caught traders off guard often enough to matter.
How does McMillan say traders should prepare?
The broad stance McMillan described is being long volatility. The catch, he said, is that VIX futures, VIX options and the exchange-traded products built on them can behave in ways many traders do not fully understand.
He argued that buying October volatility exposure now may miss the real action if the jump arrives sooner, as he said happened in early August 2024. A product tied to October could still gain in that case, he wrote, but it would likely lag something expiring closer to the volatility burst.
McMillan’s preferred approach was to buy shorter-term volatility exposure and roll it forward until a spike arrives. He used the example of a money manager rushing to buy S&P 500 puts during an August market break, saying the near-term protection would likely be the urgent target because it costs less in dollar terms.
That rush, he wrote, can push near-term VIX futures up faster than longer-dated contracts. McMillan pointed to September and October 2008 as an extreme case: he said VIX products expiring in September and October rose about 600%, while those expiring in February 2009 gained about 10%.
Which volatility products did he discuss?
McMillan said volatility ETFs and ETNs do not avoid the issue because they hold VIX futures underneath. He said traders seeking near-term VIX action should focus on products owning futures expiring in roughly the next two months, naming UVIX and VXX as examples.
He advised against intermediate-term products such as VIXM, saying their expirations are too far away for the kind of near-term volatility move he is describing.
McMillan also favored VIX options, or options on volatility ETFs, over futures exposure. His reasoning: futures can fall sharply when VIX declines and time premium fades, while an options buyer knows the maximum possible loss at the start.
For this specific setup, he said out-of-the-money options can make sense because VIX can move fast when it breaks higher. As an example, he described buying options 33% out of the money based on the price of near-term VIX futures.
McMillan is president of McMillan Analysis, which is registered as an investment adviser and commodity trading adviser. MarketWatch’s disclosure said he may hold positions in securities recommended in the report, either personally or in client accounts.
This story draws on original reporting from MarketWatch.