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11 February 2018 | 11:48PM EST

Cross-Asset Positioning: What We are Watching

We monitor key positioning indicators including put-call skew, options open interest, John Marshall
+1(212)902-6848 |
rates volatility and credit spreads to assess the unwind of the bullish equity john.marshall@gs.com
Goldman Sachs & Co. LLC
positioning and understand where cross asset risks may be continuing to rise. In our
Rocky Fishman, CFA
view, increased volatility in rates, credit and options markets in the context of a +1(212)902-3396 |
rocky.fishman@gs.com
significant increase in bullish equity positioning created an environment where small Goldman Sachs & Co. LLC

changes in economic data and sentiment drove a sell-off in risk assets over the past Katherine Fogertey
+1(212)902-6473 |
two weeks. Although volatility clearly has not yet subsided, evidence from the term katherine.fogertey@gs.com
Goldman Sachs & Co. LLC
structure of options shows the market is pricing in some optimism that this volatility Jonathan Kahnowitz
+1(212)357-5328 |
increase will be short-lived. jonathan.kahnowitz@gs.com
Goldman Sachs & Co. LLC
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Vishal Vivek
What we are watching... +1(212)902-2603 | vishal.vivek@gs.com
Goldman Sachs & Co. LLC

Arun Prakash, CFA


+1(212)934-6218 | arun.prakash@gs.com
Goldman Sachs India SPL
We look for evidence that investors are willing to hedge at unusually high prices
even after a nearly 10% decline in the equity market. We were surprised by the
continued demand for call options in the early stages of this market decline as
investors remained in “buy the dip” mode. Thursday and Friday marked an increase
in demand for puts relative to calls as evidenced by put-call skew and put-call
volumes.

1. Put-call skew: Up, but not at extremes. We compare the cost of puts to the
cost of calls to understand whether investors are paying up for downside (puts)
or upside (calls). Put-call is up over the past two weeks, but is only in its 72nd
percentile relative to the past year, suggesting investors are not yet paying
extreme prices for puts relative to calls. Other global indices have not fallen as
strongly as the SPX on a beta-adjusted basis but have seen sharper increases in
skew.
2. Put-call volume ratios: Accelerated on Thursday and Friday. The volume of
puts traded relative to calls had remained low through Thursday as investors
were focused on buying calls to profit from a rebound. On Thursday and Friday,
put volumes increased relative to calls, sending the put-call volume ratio to 1.31,
its highest level since the US Presidential election.

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certification and other important disclosures, see the Disclosure Appendix, or go to
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analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.
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3. SPY and SPX call-put open interest: Shows investors are still bullishly
positioned. While prices and volumes are good real-time indicators of where
investors are adding to positioning on the margin, the outstanding open interest in
SPY and SPX options give us insight into the size of the current positions in
portfolios. Call open interest is currently at an all-time high relative to puts for SPY
options, which are typically used by retail investors. Call open interest is up relative
to puts for the institutional SPX contracts, but it is near its 4-year average on an
absolute basis. We look for increases in put open interest to indicate that investors
have added hedges to their portfolio.
4. Credit market: Equity has not yet “caught down” to credit. We believe credit
investors may have an advantage over equity investors in interpreting the drivers of
moves in the rates market and the equity options market. Further, the high
correlation of equity to credit spreads over time means they offer a valuable
“independent” indicator of company valuations. Credit weakened in mid-January,
suggesting 4% downside to equities. During the decline over the past two weeks,
equity has nearly “caught-down” to credit, but we continue to see equity as 2%
overvalued on this analysis.
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Exhibit 1: If investors are hedging at any cost, Put-skew would be Exhibit 2: Put volumes rose to extreme levels on Thursday-Friday
near all-time highs Put-call Volume Ratio, PCUSTOTL Index
SPX 1-month put-call normalized skew (25dp-25dc)/50dc

0.60 1.35

0.55 1.25

0.50
1.15
1-mth Normalized Skew

0.45
Put-call volume

1.05
0.40
0.95
0.35
0.85
0.30

0.25 0.75
SPX Index 1-mth Normalized Put-Call Skew
0.20 0.65
Put-call volume ratio
0.15
May-17 Jul-17 Sep-17 Nov-17 Jan-18 0.55
Feb-17 May-17 Aug-17 Nov-17 Feb-18

Source: Goldman Sachs Group Inc. Source: CBOE, Bloomberg

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Exhibit 3: Call open interest is high relative to puts, showing Exhibit 4: We are watching for stabilization in credit derivatives
investors are positioned for further upside (particularly for SPY) Total return of selling protection in CDX IG 5Y at 12 times notional vs
Call open interest / Put open interest for SPY and SPX buying the stocks of the companies in the CDX IG S29

0.75 12%
EQUITY: GSCBIG OTR total return index
10%
CREDIT: CDX IG 5Y OTR (12x notional)
0.65
8%
Call/Put open interest

Indexed Return
6%
0.55

4%

0.45 2%

0%
0.35
-2%

SPX Call/Put Open Interest SPY Call/Put Open Interest


-4%
0.25 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18
Feb-14 Nov-14 Aug-15 May-16 Feb-17 Nov-17

Source: Bloomberg Source: Goldman Sachs Group Inc.

What can we learn from term structure and the global volatility landscape
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Although volatility clearly has not yet subsided, evidence from the term structure of
options shows the market is pricing in some optimism that this volatility increase will be
short-lived.

Term structure is sharply inverted; longer-dated VIX futures have fallen to a level it took
them months to reach in 2015.
Although last week’s volatility spike drove shorter-dated implied volatility toward (and by
some measures beyond) the multi-year highs set in August 2015, market expectations
of how volatile markets will be several months from now (measured by 5-6 month VIX
futures) are considerably lower than they were in the aftermath of August 2015’s
volatility spike. This strong inversion of the term structure indicates that the market is
hesitant to price in high volatility for the long term, a reflection of how low volatility was
in the many months leading up to last week’s sell-off.

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Exhibit 5: VIX futures are pricing a faster return to low vol than post-August 2015
Rolling weighted average VIX futures prices

Source: Goldman Sachs Global Investment Research, Bloomberg

Exhibit 6: SPX term structure is more inverted than it was in the aftermath of 24-Aug-15
Median SPX at-the-money implied volatility (%)
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Source: Goldman Sachs Global Investment Research, Goldman Sachs Group Inc.

Vol-of-vol remained near its all-time peak all week; limited risk VIX normalization
trades are expensive
Buying VIX puts and put spreads in the aftermath of a severe volatility spike can be a
safe way to position for volatility to normalize; however, currently VIX option prices (as
measured by the VVIX vol-of-VIX index) are unusually high. We are surprised to see how
persistent vol-of-vol is: though recent vol-of-VIX has been exceptional, the most
important driver of it (VIX ETP flows) is no longer in place. While we acknowledge that
the sample size of spikes of this magnitude is limited, in past volatility spikes that
quickly drove the VIX above 30, it has taken over a month for the VIX to fall below 20 and
the VIX has not fallen much below 15 for the following several months.

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Exhibit 7: Vol-of-VIX has stayed at peak longer than in prior events


VIX index and VVIX vol-of-VIX index, 2010-present

Source: Goldman Sachs Global Investment Research, Bloomberg

Exhibit 8: Following major VIX spikes, it has historically taken over a month to return to a sub-20 VIX
Range of VIX prices N months following a period with the VIX over 30 (after being below 20 within the prior two
weeks); dark line is median, dotted lines are months to current VIX expirations, current event in red
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Source: Goldman Sachs Global Investment Research, Bloomberg

Global indices are starting to regain their volatility premium to the SPX after lagging all
week; very high global equity index skew reflects short-term fears
! Unusually low volatility differences between global indices and the SPX. One
of the most notable derivative market dislocations in the early aftermath of last
week’s volatility spike was unusually low and often negative spreads between the
implied volatility of other equity indices and the SPX’s. This indicated that in the
initial phase of the sell-off, markets viewed the event as an idiosyncratic,
technicals-led event centered around the SPX, but have slowly started to price in the
possibility of increased global de-risking by widening these global volatility spreads.
! EEM-SPX implied volatility spread low for a sharp sell-off. The EEM-SPX implied
volatility is one to watch – should markets start pricing further risk-off, trading the
spread could expand quickly because of the EEM’s dual FX and equity exposures.

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! Global index skew stronger than SPX skew. Additional fear of a further global
sell-off has been priced in via high implied volatility skew. SPX skew is high, but not
unusually so, after starting this year lower than its recent norm. Skew has risen
more strongly for many other global indices (particularly the EuroStoxx 50); perhaps
these movements indicate fears over other indices’ catching up to the downside per
their usual beta.

Exhibit 9: Many indices that typically have higher implied vol than the SPX now have lower implied vol -
including EEM (down 9.0% MTD)
Month-to-date price return and 1-month ATM implied volatility (as of local market close)
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Source: Goldman Sachs Global Investment Research, Goldman Sachs Group Inc.

Exhibit 10: High implied volatility skew across global underlyings reflects continuing short-term fear
Median 1-month 25-delta put-call implied volatility skew, normalized by at-the-money

Source: Goldman Sachs Global Investment Research, Goldman Sachs Group Inc.

VIX market positioning has shifted post-sell-off; a bid for VIX futures may linger
By necessity, VIX markets have more positioning adjustments to make than others in
the coming days as the now-much-smaller short ETPs were linked to a substantial
portion of the VIX futures market (40% of short open interest last month):

! CFTC shows increased short VIX futures positions from the Dealer category.
This week’s Commitment of Traders report shows that the Dealer category reported
a large (80k contract change over two weeks) move toward short VIX futures

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position, versus the roughly flat position carried in recent weeks. The
harder-to-interpret non-reportable category also shows a substantial (40k contracts)
short VIX futures position. The number Dealer entities reporting short VIX futures
positions also increased this week.
! March VIX future open interest fell this week - consistent with a decline in
ETP-like trading. Because the rolling future strategies VIX ETPs employ are such a
substantial portion of VIX futures trading, the second monthly VIX future normally
sees its open interest rise on a near-daily basis until the first future expires and it
becomes the first future. A quick drop in the March (2nd monthly) future’s open
interest leaves us on the lookout for a new, possibly lower-volume, trend in VIX
futures trading patterns.

Exhibit 11: Following Monday, Dealers appear to have added short VIX future positions
Number of Dealer entities and net Dealer VIX futures position reported by the CFTC Commitment of Traders survey
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Source: Goldman Sachs Global Investment Research, CFTC

Exhibit 12: Mar-18 VIX future open interest has fallen - unusual for the 2nd VIX future
Open interest of recent monthly VIX futures, thousands of contracts

Source: Goldman Sachs Global Investment Research, Bloomberg

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Exhibit 13: Risk of a repeat ETPs-fueled VIX spike is currently small with short products diminished
Outstanding vega ($mm exposure per VIX futures point) of major VIX ETPs

Source: Goldman Sachs Global Investment Research, Bloomberg


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Disclosure Appendix
Reg AC
We, John Marshall, Rocky Fishman, CFA, Katherine Fogertey, Jonathan Kahnowitz, Vishal Vivek and Arun Prakash, CFA, hereby certify that all of the
views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify
that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs’ Global Investment Research division.

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