Goldman Sachs has issued a warning to investors about the potential for an increase in market volatility. John Marshall, the bank's derivatives strategist, pointed out on Wednesday that the S&P 500 index's options volatility has historically risen by an average of 27% from August to October over the past 95 years. Similarly, October's average realized volatility has been notably higher than other months for the S&P 500, as well as for the Nasdaq 100 and the Russell 1000 and 2000 indexes over the past four decades or more.
Marshall highlighted that investors may be underestimating the influence of macro-risk factors due to the current calm nature of markets. Emerging geopolitical uncertainties, efforts by central banks to curb inflation without triggering economic downturns, and the possibility of a U.S. government shutdown could potentially trigger a significant market adjustment.
Advising against selling options, a traditionally favored trade, Marshall's team points to expected seasonal volatility increases and a busy schedule of corporate earnings reports and other financial updates in October. It was noted that during this month, corporate management teams as well as investment managers face increased pressure to meet annual performance objectives.
October can be particularly punishing for any company that underperforms in its earnings reports, investor-day meetings, and financial outlook announcements for the forthcoming year. Market volumes reflecting the intensity of investor reactions have typically peaked in October over the past 26 years, both in shares and single stock options volumes.
To protect against potential market disruptions, Marshall suggests investors consider purchasing October call options on the Cboe Volatility Index (VIX), thereby hedging portfolios against anticipated stock market frailty. The VIX, which recently hovered around a subdued 14, is a non-traded index used to track market volatility. Investors can capitalize on potential market turbulence by buying VIX call options, known for their high-risk, high-reward nature.
Alison Edwards, a strategist at Susquehanna Financial Group, has also flagged significant VIX "tail-risk hedging" to her clients. These are typically low-cost trades that can yield substantial returns if the stock market plummets. For example, a recent trade could gain value if the VIX were to surge to $47.50 in March.
Despite the current focus on portfolio hedging and VIX spikes, Marshall anticipates that trading in individual stocks will regain popularity once investors gain confidence that central banks are approaching the end of disruptive interest-rate hikes.
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