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The market looks shaky. Put options can protect you, Goldman says.
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Ian Salisbury , Barrons Markets' relative calm means put options are fairly inexpensive. A trader works on the floor of the New York Stock Exchange (NYSE). (Photo: AFP) Gift this article
The stock market keeps climbing, seemingly impervious to a fragile U.S. economy, so investors may want to hedge their portfolios against a selloff. Put options may be an attractive way to do it, according to Goldman Sachs.
The stock market keeps climbing, seemingly impervious to a fragile U.S. economy, so investors may want to hedge their portfolios against a selloff. Put options may be an attractive way to do it, according to Goldman Sachs.
These days, it seems like nothing can hold back stocks. While the S&P 500 rose just 0.3% on Thursday, the index closed at its 18th record high for the year.
The gains come despite worrisome recent economic data, pointing to slowing consumer spending and stubborn inflation. President Donald Trump's attacks on the Federal Reserve and unpredictable trade policies are additional risks.
Another sign of the market's complacency is the Cboe Volatility Index, also known as the VIX. The indicator, often described as the market's fear gauge, has fallen to 14.7 from its peak at more than 52 on April 8, when worry over Trump's so-called Liberation Day tariffs was hammering the stock market. Its long-term average is 19.5.
That relative calm provides a hedging opportunity for investors, according to a note from Goldman Sachs on Thursday. Prices for put options, which give stock investors the right to sell at a certain price on a future date, are closely tied to market volatility. That makes them look comparatively cheap right now, despite potential dangers.
'We believe markets at all-time highs and low volatility levels provide [an] attractive opportunity for investors [to] hedge against a drawdown," wrote the Goldman team, led by researcher Arun Prakash.
Goldman also identified a number of stocks and exchange-traded funds that it says represent attractive candidates. The stocks and funds are all ones that have shown above-average sensitivity to U.S. economic growth, but still boast comparative cheap options prices.
Three ETFs Goldman recommends are the iShares S&P 500 Growth ETF, SPDR S&P Regional Banking ETF, and VanEck Semiconductor ETF.
Goldman looked at three-month puts that were 5% out of the money, meaning the target security's price would have to fall 5% for the options to pay off. To compare the cost of the put options, the bank expressed their prices as a percentage of the target security's share price.
iShares S&P 500 Growth ETFs put options cost just 1.4% of the value of a fund share, compared with 3.1% for the regional banking ETF and 3.3% for the semiconductor fund.
When it comes to individual stocks, Goldman recommends investors target three regional banks: KeyCorp, with put options priced at 2.1% the value of a share; Regions Financial, with puts priced at 1.7%; and Huntington Bancshares, priced at 1.8%.
Regional banks, which lack large trading desks and wealth management arms, tend to be less diversified and more sensitive to interest-rate fluctuations than megabanks. They are another area where investors seem to be shrugging off the risk of a slowing economy.
Despite worries about slowing growth, the SPDR S&P Regional Banking ETF has returned a solid 4% so far in 2025. An investor holding a put could benefit if it heads south.
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