Goldman Says Sharp Drop in Volatility Is Opportunity for Hedging

The recent sharp pullback in volatility as year-end approaches creates hedging opportunities given the cloudy outlook for equities, according to Goldman Sachs Group Inc. strategists.

Wall Street’s “fear gauge” — the VIX volatility index — last week hit the lowest since the coronavirus pandemic. But investors continue to weigh risks to the outlook, ranging from geopolitics, next year’s busy elections calendar and the potential for shocks on the economic growth front, the team led by Christian Mueller-Glissmann wrote in a note dated Nov. 27.

“After the recent equity rally, we believe there is an attractive entry point to hedge the risk of a retracement,” the strategists said.

They note that three-month put spreads on the the S&P 500 are trading close to all-time lows. For longer investment horizons, they like equity collars — a strategy where near at-the-money puts are financed by selling out-of-the-money calls.

We Like Put Spreads In the Near Term and 1 Year Collars