With the August sell-off fading from view and the U.S. presidential election still more than a month away, this may be the right time for investors to buy some protection against volatility, according to Goldman Sachs. The Cboe Volatility Index , or VIX, fell below 16 on Monday and is now flirting with its lowest level since the July doldrums. The index, often called Wall Street’s “fear gauge,” is a measure of expected volatility over the next 30-days based on market pricing of S & P 500 options. Its current level is a stark retreat from the 65 mark the VIX hit on Aug. 5 during the global market sell-off. .VIX 3M mountain The VIX has fallen well below its spike from Aug. 5. Arun Prakash of Goldman’s derivatives research team said in a note to clients Friday that the pullback has likely gone too far, especially with the added uncertainty of the U.S. election ahead. “Our historical study of volatility shows that the VIX averaged 22 points in October, 4 points above the current VIX level. We believe the low implied volatility, upcoming October earnings season and elections provide an attractive opportunity for investors to hedge a potential rise in volatility,” the note said. The trade idea offered by Prakash involves buying call options on the VIX itself. The options would have a strike price of 18 and expire in November, serving as a bet that expectations of volatility will rise as the election nears. “VIX has increased 6% from September to October historically, driven by seasonality. We believe SPX close to its all-time highs, VIX below its multi-year average, our model estimated upside to VIX and seasonal factors offer a compelling case for investors to own VIX calls to hedge potential rise in volatility,” the note said. If the VIX fails to surpass the mark of 18 before expiration, the loss on the trade is equal to the premium paid for the option up front. There are no additional losses on the trade if the VIX actually declines instead.
