The VIX is jumping today as stock market slump but analysts at Goldman Sachs think it could rise much further from here. The volatility index offers a good hedge on stock markets as it rises exponentially as equities fall.
Goldman Sachs says its volatility model sees an average of 21.5 on the VIX in April compared to the current level of 15.
It's not an outright call but they recommend VIX buying as a hedge for equities.
We believe 1) VIX at a historically low level, 2) SPX close to its all-time highs, 3) high demand for upside asymmetry, 4) our model estimated upside to VIX and 5) upcoming macro/micro catalysts offer a compelling case for investors to own VIX calls. Over the past 30+ years, VIX has averaged 19 in April, and we see upside risks to the current low VIX levels given current macro environment and upcoming macro/micro catalysts. S&P 500 index skew is close to multi-year lows, indicating that the upside asymmetry is crowded, and we believe VIX calls would be an attractive hedge in case of a pullback in equities.
It's a bold call and the timeline is aggressive. They see several potential catalysts, including 1) upcoming analyst days 2) earnings season 3) macro events, led by the FOMC meeting (3/20) along with 4) election-related catalysts could drive volatility higher from here.
They suggest buying VIX April monthly expiry $16 calls. It's not totally unreasonable but that's a short timeline to work with.
