Goldman Sachs Volatility Team: Market Downside Skew Structure Failed
Claire Weston
Options markets are pricing the least downside fear in nearly two years — even as the S&P 500 keeps making all-time highs. Goldman says that complacency is itself the risk signal.
Why have investors suddenly stopped hedging the downside?
Goldman derivatives strategist Brian Garrett sums up the mood shift: March was "make it stop"; by May it became "wow, still going up?"
S&P 500 volatility skew has fallen to an 18-month low — put options (insurance against a drop) have cheapened while call options have gotten expensive.
In plain terms = everyone is scrambling for tickets on the "keep rallying" boat; nobody wants to buy the "what if it drops" insurance.
How low has the "fear gauge" actually gone?
Goldman's proprietary panic index — a composite two-year percentile ranking of VVIX, VIX, skew, and at-the-money volatility — closed Friday in the single digits, a two-year low.
The market now prices roughly equal probability — about 8% each — for a 10% rise and a 10% fall in the S&P 500.
This means → the options market no longer distinguishes between upside and downside risk. Garrett calls this "skew failure."
What are the bears worried about?
Concentration risk: the top ten S&P 500 stocks account for 40% of the index, and the last four all-time highs have all come with negative breadth — a pattern never seen before.
Non-AI stocks are lagging: strip out AI-related names and the rest of the S&P 500 trails by roughly 700 basis points year-to-date.
This reflects a rally driven almost entirely by a handful of AI mega-caps, while the broad market has not kept pace.
What trades does Goldman recommend?
With skew at extreme lows, hedging is cheap — Goldman recommends buying S&P 500 puts, citing an attractive payoff structure.
They also favor equal-weight S&P 500 (RSP) outperformance options versus S&P 500 (SPX) — one-month 100% outperformance costs about 145 basis points. In plain terms = if breadth normalizes, the equal-weight index catches up.
Additional ideas: buy VIX calls as a hedge — the August-and-beyond term structure is extremely flat, with VVIX at 86; and go long bitcoin-ETF volatility, delta-hedged — pricing sits at a two-year low, roughly 10 vol points below SMH.
What are hedge funds and leveraged money doing?
Goldman Prime Brokerage data shows hedge funds were net buyers for a second straight week at the fastest pace of the year, driven by long buying and macro short-covering.
Global leveraged / inverse single-stock ETF AUM has surpassed $60 billion, doubling in two months.
This means → professional money is chasing the rally while amplifying directional bets through leveraged ETFs — appetite is growing, but hedging is shrinking.
Content is for reference only, not financial advice.