Citadel Securities sounds the alarm: September “curse” combined with cheap options, short-term risk-reward in US stocks deteriorates sharply

Zhihu Finance APP has learned that September is typically the worst-performing month for US stocks in a year, with the S&P 500's average monthly return at its lowest for the whole year. Currently, option prices are also at their cheapest level of the year—making the risk-reward ratio for buying downside protection particularly attractive when both factors combine.

This is the core view presented by Scott Rubner, Head of Equities and Equity Derivatives Strategy at Citadel Securities, in a client report on Monday (August 31). Rubner points out that the bullish trend which pushed the S&P 500 to record highs in August is starting to shift.

“This is not a shift in our long-term bullish stance on equities but rather a change in short-term risk-reward,” Rubner wrote in the report. He cited the earnings calendar, share buyback outlook, seasonal factors, and retail trading behaviors as reasons for caution. “Taken together, these elements are changing the short-term asymmetry. Upside catalysts are becoming less apparent, while downside catalysts are accumulating.”

Sideways Movement and Low Volatility Following Historic Highs

In August this year, the S&P 500 briefly hit a record intraday high of 7,816.70 points, after rising nearly 7% cumulatively from the end of July through the first week of August. However, since then, the benchmark has moved sideways or slightly down. Meanwhile, the Cboe Volatility Index (VIX) fell to 14.1 last week, marking its lowest level so far this year.

Mandy Xu, Head of Derivatives Market Analysis at Cboe, stated in a report released Monday morning that technology sector earnings have beaten expectations—especially NVDA's performance last week—which has helped compress the volatility risk premium for tech stocks and eased concerns around AI-related trades.

Cboe data show that the historically high premium of single-stock volatility over index volatility has also receded. The VIXEQ index, reflecting the implied volatility spread of the top 50 S&P 500 constituents, has narrowed significantly; the price spread between QQQ (tracking Nasdaq-100 volatility) and SPY has also dropped to the 20th percentile for the year after peaking at a historic high in June.

Downside Protection Is “Cheap,” but Retail Buying Remains Weak

Rubner believes that this makes buying downside protection relatively inexpensive at the moment.

However, September’s challenges are not limited to historical statistics. Rubner points out that, among the retail trading activity tracked by Citadel Securities, September is also the weakest month for buying each year. Since 2019, the average net retail buying on S&P 500 down days in September is only about half the yearly average.

In addition, Rubner expects corporate buybacks to slow as well—starting around September 12, when listed companies enter the buyback blackout period, gradually tightening related restrictions.

A Dense Period of Macro Events Approaches, Yet Protection Premiums Stay Low

“Investors are moving into a period of more frequent macroeconomic events, yet are still paying relatively low premiums for protection,” Rubner noted.

Just in mid-August, Rubner believed the US stock market's “technical reset” was basically complete and that systematic strategies were likely to re-leverage. At that time, he pointed to systematic funds, retail investors, passive ETFs, and corporate buybacks as four strengthening forces forming a reinforcing buying pattern. Yet just two weeks later, as the historically weakest month of September arrives, he has sharply shifted to a more cautious short-term stance—disappearing upside triggers, accumulating downside risks, and cheap protection costs now form the core of the market’s current short-term dilemma.

For investors, after enjoying the calm and gains of the summer, an extra degree of caution may be warranted for the September market.