Having grown up in a household with both parents in the financial industry, my awareness of the stock market started at an early age.
I can remember during my first few months in college I would ask people around me "how the Dow Jones is doing today" and be met with blank stares.
My background also meant that I had heard a lot about (and lived through) "Black Monday," a market crash in 1987 that saw the Dow Jones Industrial Average drop roughly 23% in one day.
Notably, Black Monday occurred in the month of October, which was coincidentally the same month that captured another famous crash ("Black Thursday"), which occurred in 1929.
Although superstitions may be less prevalent in the modern era, the fact that October has captured some of the biggest crashes in the market's history has likely remained a prominent fixture in the minds of many professionals in the industry.
It's for this reason that many market participants get slightly skittish when fall sets in across the United States.
Interestingly, recently published tastytrade research suggests that "seasonality" in the stock market may be as fictional as the "Headless Horseman" in Washington Irving's "The Legend of Sleepy Hollow."
And while both myths persist, it looks increasingly like neither has any basis in reality.
In order to evaluate the question of "seasonality," the Options Jive team reviewed historical data from both the VIX and the SPY dating back to 1993.
Interestingly, the VIX has shown a tendency to climb higher during late summer and early fall. As you can see in the chart below, the average VIX range has been higher in September and October as compared to the other 10 months of the year:
The above tells us that the market does build in a degree of additional risk premium in option prices during September and October.
The next question is whether the market's average movement during that period falls outside its "normal" behavior. And whether the short premium approach (selling risk) has performed significantly worse during this "season" of the year.
The answer to the first question, according to tastytrade's review of the data, is that the market has not behaved outside it's "normal" patterns during September and October. A graphic is contained in the episode that provides more details on this finding.
Additionally, a backtest of a simple short strangle strategy going back to 1993 also showed that the success rate doesn't suffer during the late summer/early fall. This study reviewed short 16 delta strangles deployed every month dating back to 1993, and produced a consistent success rate no matter the month in question.
For all months, the average win rate for a short 16 delta strangle in SPY was 91%. For September and October, the respective win rates were 86% and 88% - only marginally lower.
For what it's worth, the highest win rates (on average) occurred in January, June, November, and December.
We encourage you to review the episode focusing on the “seasonality myth” in greater detail when your schedule allows.
If you still aren't convinced, or have additional questions, we hope you'll reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.