Goldman Says Use S&P 500 Calls to Position for Return to Record

(Bloomberg) -- Goldman Sachs Group Inc. has some advice for investors bruised by this month’s U.S. equity sell-off: use call options to position for a rebound to last month’s record highs.

The S&P 500 is down 4.7% from its July 26 record as the trade war blow-ups and a rally in the bond market stoked concern about slowing global growth. Goldman strategists led by John Marshall and Arun Prakash recommend buying 5% out-of-the money one-month call options on the index to position for an increase in equity prices driven by a modest increase in investment and borrowing. They see a 26% chance of the index rallying 5% over the next month, while options are only pricing in a 7% chance.

“The underlying supportive trends of institutional investor positioning and Fed monetary policy easing have been temporarily obscured by investor focus on U.S.-China tensions,” the strategists wrote in a research note Monday. There is potential for “upside asymmetry over the next few months,” they said.

Goldman’s S&P 500 recommendation came as the firm upgraded its view on selling options to neutral from cautious, saying equity should outperform credit over the next few months. Implied volatility for the average S&P 500 stock is flat week-over-week at 24%, which makes buying call options attractive, especially with few near-term catalysts and lower general trading activity, according to the firm’s analysis.

On Thursday, JPMorgan derivatives strategist Shawn Quigg recommended investors use S&P 500 call options for a return to year-to-date highs on the index.

To contact the reporter on this story: Gregory Calderone in New York at gcalderone7@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer

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