Goldman Recommends Buying November 1,125 SPX Puts, Dec VIX Puts, Selling Dec VIX Call Spreads

From Goldman's Krag Gregory (Ph.D): "Expectations for QE2 and the election are high and fear as measured in options has been cut in half. We analyze the “optimal put” to buy for those who are fully invested, have participated in the recent market rally, and are concerned that the Fed or the election may disappoint. In a scenario where the market pulls back -2.5% by market close Wednesday, the optimal hedge is buying SPX November 1125 puts for $6.6, in our view." Yet the top recommendation by Goldman, based on some ironclad technical analysis, is that "VIX Futures are at 24.3, a hefty 12 points above or 2x the average realized vol level of 12 post midterm elections. If the FOMC and election results meet expectations, we see a scenario where implied vol could fall notably. We like using VIX options to position in a limited loss fashion." Therefore Goldman's two recommended trades: Trade1: Sell Dec-10 20-22.5 VIX call spreads for a credit of $1.2 (sell 20 calls/buy 22.5 VIX calls). Trade 2: Buy Dec-10 VIX 21 puts for $1.1. Of course, the past 12 midterm elections all occurred during an unprecedented market regime in which overall vol was trading in the 9-11 range, and as a result killed the swaption market. But who cares. All that matters is that Goldman wants to buy vol from its clients.

And what is it selling? (more)