According to Goldman Sachs' model, given the current macro environment, the VIX level should be 24.5, significantly higher than the current level. Additionally, over the past 30 years, the VIX has averaged a 6% increase from September to October each year. The U.S. stock market is also facing macro catalysts such as the upcoming elections, Federal Reserve meetings, and the October earnings season.

What are VIX call options?

VIX call options are derivatives based on the CBOE Volatility Index (VIX), reflecting market expectations of future volatility. Investors typically buy these options when market uncertainty increases, to hedge risks or seek profits. Their ultimate purpose is to provide protection or returns during market fluctuations, making them suitable for traders looking to gain insights into market sentiment.

Advantages of VIX call options

The advantages of VIX call options include risk hedging, potential high returns, and liquidity. They can protect portfolios during market turbulence, while investors can capitalize on profit opportunities arising from increased volatility. Furthermore, VIX options are actively traded, making them easy to buy and sell.

On Wednesday, the “fear index” measuring U.S. stock market volatility, the VIX, rose 3.5% to 18.23 points, marking a three-day increase. However, it remains significantly lower than the four-year high of 38.57 reached on August 5, during “Black Monday.” Nevertheless, this downward trend in volatility is not expected to last, and the team believes that risks will rise before the elections, recommending the purchase of VIX call options.

Source: uSMART SG

Goldman Sachs' options research team outlined three key reasons to hold VIX in a recent report.

The first key reason is Goldman Sachs’ volatility economic model, which predicts potential upward movement in VIX levels based on economic frameworks, seasonal volatility increases, and upcoming macro/micro catalysts affecting stock volatility. According to the current macroeconomic environment, the model estimates that the VIX level should be 24.5, and if each explanatory variable encounters a one standard deviation economic shock, the VIX level could reach 33. In contrast, the VIX was about 18.2 on Wednesday.

The second key reason is that historical studies by Goldman Sachs indicate that volatility tends to increase seasonally. Over the past 30 years, the VIX has averaged a 6% rise from September to October. Research into regional volatility seasonality has shown a consistent upward trend in major indices from August to October. Considering seasonal factors and upcoming macro/micro catalysts, Goldman Sachs believes that the current VIX level has upward risks.

The third key reason involves the upcoming macro/micro catalysts. The Goldman report lists several expected major catalysts, such as the U.S. elections, the Federal Reserve's FOMC meetings in November and December, and the October earnings season for U.S. publicly traded companies, all of which are anticipated to drive expectations of rising volatility.

Based on their economic framework for modeling stock volatility, increased seasonal volatility, and upcoming macro/micro catalysts, Goldman Sachs' options team believes that VIX levels may rise from now on. Their volatility economic model estimates the VIX level at 24.5, while the current level is 18.2. Additionally, their historical volatility research indicates that the VIX averages 22 in October, 4 points higher than the current level. Goldman Sachs believes that lower implied volatility, the upcoming October earnings season, and the elections provide investors with enticing opportunities to hedge against potential increases in volatility.

Four variables are particularly important in explaining volatility: (1) the unemployment rate (yearly change), (2) growth in non-durable consumer spending (quarterly change), (3) the ISM new orders index, and (4) the absolute difference between core CPI (yearly change) and core PPI (yearly change).

How to trade investments on uSMART:

After logging into uSMART SG APP, click "Search" from the upper right corner of the page, enter the target code, such as "VIX", and enter the details page to learn about transaction details and historical trends. Click "Trade" in the lower right corner and select "Buy/Sell" "Send" function, finally fill in the transaction conditions and send the order; the image operation instructions are as follows:

Source: uSMART SG

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