Goldman Sachs: S&P 500 Options Skew Hits 18-Month Low, Convergence in Upside and Downside Risk Pricing
N.R. Finch
S&P 500 options skew has fallen to an 18-month low, with the market pricing a 10% drop and a 10% rally at nearly identical odds; Goldman calls it 'skew dislocation' — yet three bearish signals are flashing at once.
What does "skew dislocation" actually mean?
S&P 500 options skew — a measure of how much extra investors pay to insure against a crash — has dropped to an 18-month low.
The market now prices a 10% decline and a 10% rally at roughly 8% probability each, almost perfectly symmetrical.
This means → investors have stopped paying a premium for crash protection; tail-risk hedging demand is at rock bottom.
Why did the skew collapse?
The put wing (the side that protects against drops) has become unusually cheap, while the call wing (the side that bets on rallies) has grown relatively expensive.
In plain terms = far fewer people are buying "crash insurance," while more are buying "rally lottery tickets" — so the two sides have converged in price.
The Goldman Sachs Panic Index — a composite of VVIX, VIX, skew, and at-the-money volatility percentile ranks — closed in single digits last Friday, a two-year low.
What are Goldman's three bearish signals?
Leadership is extremely narrow. The top ten stocks account for 40% of the S&P 500's weight. The last four all-time highs were made while market breadth was negative — that combination has never happened before.
One theme dominates everything. Strip out AI-linked names and the S&P 500 trails its headline index by 700 basis points year-to-date. In plain terms = nearly all of this year's gains come from AI alone.
The price pattern echoes a familiar chapter. Goldman's Garrett notes the current trajectory closely resembles late 1998 to 1999 — the final stretch of the dot-com bubble.
Why isn't any of this showing up in options pricing?
Garrett says internal team discussions have shifted from March's "make it stop" to May's "this is still going up?"
This reflects a striking disconnect: even professional derivatives desks are puzzled by the rally, yet the three concerns above are completely absent from options pricing.
In plain terms = the market isn't talking about fear, and it isn't pricing fear — but the facts behind the worry haven't gone away.
What trades does Goldman recommend?
For investors betting on a broadening rally: buy RSP (Invesco S&P 500 Equal Weight ETF) outperformance options versus SPX — a one-month 100% outperformance call costs roughly 145 basis points. Pair with VIX calls as a hedge; the term structure from August onward is extremely flat, with VVIX at 86.
For simple downside protection: buy S&P 500 puts outright — with put skew this low, the payout structure is unusually attractive.
An alternative angle: go long bitcoin ETF volatility with delta-neutral hedging. Bitcoin historically behaves like a "leveraged Nasdaq", yet its implied volatility sits at a two-year low, roughly 10 vol points below SMH.
What is the money actually doing?
Hedge funds have been net buyers for two consecutive weeks at the fastest pace this year, driven by long additions and macro short-covering.
Clear sector rotation is underway: financials (down 6% YTD) are seeing net buying; industrials (up 11.5% YTD) are seeing net selling. This reflects capital shifting from winners into laggards.
CTA positioning is near neutral, but the asymmetry is stark: a flat market triggers roughly $12 billion in buying over one month, while a decline triggers roughly $100 billion in selling. In plain terms = if the market turns down, systematic strategies will automatically accelerate the sell-off.
Team discussions have shifted from March's 'make it stop' to May's 'this is still going up?'
Brian Garrett
Goldman Sachs Derivatives Strategist
(Goldman Sachs weekend note)
Content is for reference only, not financial advice.