Kensho Stats

How to profit from a September volatility spike

A stock chart is displayed on a terminal as traders work on the floor of the New York Stock Exchange.
Daniel Acker | Bloomberg | Getty Images
A stock chart is displayed on a terminal as traders work on the floor of the New York Stock Exchange.

Some traders are worried the market has grown too complacent heading into September, especially considering recent hints by Fed officials of a possible rate hike during the month. Below is where investors can hide during a Fed-induced volatility spike, if history is any guide.

"Despite increased probability of a rate hike by the Fed in the FOMC meeting on September 21, no major moves are being priced in by the market and the absolute level of SPX implied volatility is also low. We recommend buying protection around the FOMC meeting," Barclays analysts told clients in a research note on Tuesday.

A similar sentiment was echoed by MKM Partners derivatives strategist Jim Strugger, who wrote:

"It's curious that with markets in a period of true data-dependency, where a stronger-than-expected nonfarm payroll number this Friday could push up odds of a rate hike at the September 21 FOMC meeting, implied volatility of TLT [Ishares Lehman 20 Year] and UUP [PowerShares DB US Dollar Index Bullish Fund] is hovering near the lows of the last two years."

Since reaching a high of 26.7 in June during the Brexit news, the CBOE Volatility Index is down nearly 51 percent, hovering around a multiyear low.

So how should investors play a potential rebound in the VIX?

CNBC PRO ran a study from Kensho, a quantitative tool used by hedge funds, to find the best and worst asset classes when the fear gauge rose by more than 5 points over a 30-day period.

Since 2004, the CBOE Volatility Index was up by more than 5 points in a month 37 times, up on average 38 percent compared with a loss of 4.9 percent for the S&P 500, according to Kensho.


During those times, asset classes that track safer bets like gold and Treasurys performed well, according to Kensho.


On the flip side, emerging markets got hit the hardest, with the iShares MSCI Emerging Markets ETF falling on average 7 percent, according to Kensho.


To be sure, among specific sectors in the S&P 500, there weren't many places to hide, with certain groups like financials and materials falling the most.

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.