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In my mind, the Summer Olympics are a time to stop, sit down, turn on the HD plasma, crack a cold beer and watch the Americans bring home the gold. The first week of the games I came home and checked my DVR for my most recent episode of Fast Money, only to realize that it was not being shown on CNBC for the duration of the Games. Oh well I thought, I'll just watch the games instead of the market commentary shows. As the Games have rolled on, as I've watched my colleagues at work watch women's equestrian, and men's water polo instead of CNBC, I've had the following thoughts:

How many other market participants, hedgers, traders, and glorified derivatives button-clickers are doing the exact same thing? Could it be that this lull in market volatility is actually a function of the seemingly 24/7 broadcasting of these Olympic Games?

I wondered about the performance of the S&P 500 Index during the last summer Olympics in Beijing in 2008. What was the performance of the S&P 500 Index for the month following those 2008 summer games? Now, looking back at a single point is anecdotal, but I was intrigued nonetheless. So, I looked back at the last three previous Olympic summer games.

In the following data, I've calculated the SPX Index price change as the Thursday close before the Friday opening ceremonies to the Friday close which precedes the Sunday closing ceremonies. I've provided the SPX Index price and percent change during the Olympic games then as well for the calendar month immediately following the Olympic Games. Here are the results:

Games

Date

Thursday Close Before Games

Friday Close After Games

Close One Month Later

Olympic Games % Change

Month After % Change

London

2012

1,360

1,406

????

3.35%

????

Beijing

2008

1,266

1,292

1,207

2.06%

-6.59%

Athens

2004

1,114

1,108

1,104

-0.59%

-0.38%

Sydney

2000

1,481

1,437

1,380

-3.00%

-3.96%

It is very interesting to note that in each of the three previous Olympic Games, the SPX Index was lower one calendar month after the Friday preceding the closing ceremony of the Olympic Games.

Additional Catalysts for Increased Volatility

The following are all additional reasons why we could see increased market volatility and the SPX Index being lower one month from now:

1. Greek Debt:

Greece's Public Debt Management Agency (PDMA) has 1 billion euro issue of debt which matures today, August 10th. In addition, they have a 3.2 billion euro bond held by the ECB which is due on August 20th. The ECB has already rejected a Greek proposal to delay the bond payment by one month. The PDMA will auction 13-week T-bills on August 14th to cover this payment. Any hiccups or problems with this amount of rolling Greek debt could be enough to trigger a market panic.

2. Spot VIX at local lows

The VIX spot index (which is priced directly from SPX index options) appears to be priced at recent lows. The VIX 50-day, 20-day, and 10-day moving averages stand at 19.03, 17.13, and 16.84 respectively. With spot VIX currently hovering around 15.5, it seems that this level is unsustainable. I believe that spot VIX trading up to its 50-day moving average is not so much a question of if, but simply a question of when.

3. Fiscal cliff concerns

JPMorgan's Tom Lee provided the following summary of the fiscal cliff: "We see ~15% chance of falling fully off the cliff. We think the odds don't change much regardless of who wins the White House in Nov. Under this adverse scenario, the S&P500 could have downside to 1100." While Washington could buy themselves time by delaying the expiration of the tax cuts at year end; however, the concern is very real and will be more publicly discussed as the Presidential election draws near.

4. The September Effect

Since 1950, the S&P 500's worth month on average has been September with an average decline of ~0.6 percent. Four times in the past twelve years the S&P has declined over 5% in September alone. In a sense, it's almost as if the masses come back from summer vacation, assess the equity market situation and start hitting the panic button. Obviously, past performance cannot predict future results, but a trend over 60+ years is a trend nonetheless.

Conclusion

With September S&P 500 Index Implied Volatilities currently at ~14.5, I think now is a good time to pick up cheap and potentially profitable downside protection in the following form:

Buy September SPX Index 1350/1400 Put Spread for ~$15.00.

Max Loss = $1,500 per 1-lot of the spread.

Max Gain = $3,500 per 1-lot of the spread.

Alternative vehicles for making a similar trade include SPY September put spreads of VXX September call spreads, though I prefer not to hold VXX for any significant period of time so I would recommend SPX or SPY as the ideal trading vehicle.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours. I am not currently long this put spread (or similar) but may initiate a short position via options in the SP 500 Index in the next 72 hours.

Source: Ring The Register On These Olympic Games