Goldman Sachs Head of Derivatives: Massive Macro Uncertainty Is Priced Abnormally Cheap
nashnova research
Goldman's derivatives trading head Brian Garrett warns that six macro risks are stacking up simultaneously while the VIX sits near 14 — the gap between implied volatility and actual risk is the market's central pricing contradiction for the weeks ahead.
Six risks at once — what exactly is piling up?
Garrett lists six concurrent pressures: the Fed and major global central banks are all on tightening paths; Brent and WTI crude closed above $100 a barrel every day last week; Middle East tensions keep escalating with no sign of de-escalation.
On top of that, the U.S. 10-year yield is pushing toward 5% and Goldman has raised year-end rate targets for several developed economies; the AI trade faces growing skepticism; and one of the most consequential midterm elections in recent years is two months away.
This means → rates, oil, geopolitics, and politics are all tightening at once. A surprise deterioration on any single front could trigger a chain reaction.
Why is volatility called "unusually cheap"?
The VIX closed near 14 last Friday. S&P 500 convexity — a measure of how much protection options offer against extreme moves — sits below the 10th percentile; some single-stock convexity has dropped to the 0th percentile.
In plain terms = the cost of buying insurance has fallen to multi-month or multi-year lows, yet the storm signals outside are getting stronger — premiums and risk are rarely this misaligned.
Garrett's own words: "The implied vol market is allowing you to enhance expressions of the above views via defined-loss strategies at the cheapest levels in months, if not years."
Where is the money moving?
Goldman's prime brokerage data show the largest net buying in five weeks last week, driven by macro short-covering and single-stock long additions. Net exposure rose 2.7 percentage points from the start of the month, rebounding from a one-year low.
At the sector level, capital is rotating from defense to offense: tech, financials, materials, and consumer discretionary saw net buying over both one-week and one-month windows; healthcare, real estate, energy, and industrials saw net selling.
This reflects a split in market sentiment — participants talk about accumulating risk, yet their hands are adding to offensive sectors and unwinding hedges.
What signals is the derivatives desk picking up?
Heading into the Fed meeting, Goldman's derivatives desk observed three types of activity: protective positions on the S&P 500 and Nasdaq 100 are being unwound; outright call buying is rising; and previously held upside spreads are being restructured.
All three point the same way — buying Delta, meaning adding exposure to an upward move — and the notional volumes are sizable.
This means → institutional investors are choosing to drop their guard and lean into offense ahead of the rate decision, a stance that echoes the cheapness of volatility pricing.
What specific trades does Garrett recommend?
Vanilla options: use low single-stock implied vol to run stock-replacement strategies ahead of midterms; Russell 2000 ETF implied vol has hit a five-year low — Garrett sees opportunities to go long Russell 2000 vol / short S&P 500 vol and to take directional positions; he also recommends going long a cybersecurity basket that is up roughly 60% year-to-date.
Exotic options: S&P 500 right-tail costs keep compressing. Lookback options — contracts that settle at the best price within a window — look attractive in this environment.
Specific quotes: S&P 500 three-month 95% lookback puts at roughly 1.8% (vanilla ≈ 1.25%); Russell 2000 at roughly 3.0% (vanilla ≈ 1.9%); Nasdaq 100 at roughly 3.2% (vanilla ≈ 2%).
How long can this divergence hold?
Garrett's core call: the cheapness of implied volatility and the actual accumulation of macro risk are significantly divergent.
In plain terms = the market is pricing risk assets as if conditions are calm, but the risks themselves haven't gone away — it's like storm insurance going on sale right before a hurricane. Either the storm doesn't come, or the pricing is wrong.
Whether this divergence can persist will determine if markets continue to grind in low-vol mode or face a sharp repricing of volatility in the weeks ahead.
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