Regular readers know that Goldman’s Katherine Fogertey and John Marshall (God bless ’em) are on a veritable quest to find ways for clients to capitalize off low vol.
If you’re not familiar with this quest, you should maybe read the recent history in the following posts:
- “Not All Sunshine And Rainbows”: Goldman “Finds Fear” In These 15 Stocks
- “Mark It Zero!” Goldman’s Top 10 Options Trades To Capitalize On Low Vol
- Goldman: It’s Time To Replace Your Stocks
The whole thing revolves around a few simple questions:
- how can investors exploit low vol to gain cheap upside exposure and thereby reduce the risk associated with owning inflated equities
- and relatedly, are there some names for which the options market seems to be pricing trouble ahead
Well in the wake of last month’s fleeting risk-off moment during which, if only for one day, investors were reminded that benchmarks can go down as well as up, Goldman is out with the latest in this ongoing series and it’s appropriately entitled “Complacency Makes A Comeback.”
The premise is simple. To wit:
We recommend investors use the return of complacency to buy ETF options for macro catalysts.
We believe the current environment provides an attractive entry point for investors to buy ETF options to position for upcoming macro catalysts (i.e., ISM 1-June, Payrolls 2-June, FOMC 13-June) and sector catalysts (i.e., ASCO for Health Care 2-June, NAREIT for REITS 6-June).
Complacency makes a swift comeback; buy inexpensive options for upcoming macro catalysts. Just two weeks ago (17-May), amidst heightened political uncertainty surrounding President Trump and Russia, investors sold stocks and ETFs, and bought put options to hedge exposures. That day, the S&P500 closed down 2%, the 3rd worst trading day over the past year, and S&P500 1m normalized skew jumped from the 48%-ile over the past year to nearly the highest level in a year and on record. The selloff was led by Financials (XLF), Biotech (XBI), and Technology (XLK), each down 3% on the day.
But since the 17-May sell off, the S&P500 has more than fully recovered, and implied volatility and skew levels have since relaxed. In fact, S&P500 (SPY) 1m implied volatility of 8% is near its pre-sell off level, and most sector ETFs have followed suit.
We recommend investors use the return of complacency to buy June straddles on the SPDR Utilities ETF (XLU) and the iShares US Real Estate ETF (IYR) for upcoming macro (FOMC 13-June) and sector catalysts.