"Short them now while there's still time!" Goldman Sachs warns US stocks are overvalued, launches 6 hedging trades.

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As risk assets return to historic highs, Goldman Sachs warns: the market rally is too aggressive, making it a good opportunity to set up cross-asset hedges.

Goldman Sachs trader Tom Shea pointed out in his latest report that the current market is "overbought." He advises investors to "act while there’s still time" by building hedges for two potential risk scenarios: renewed escalation in geopolitics, and ongoing de-risking with slowing growth and elevated inflation. The report was released on April 16, when the S&P 500 had already reached a record high of 7022 points.

Goldman Sachs proposed six specific trades spanning equities, credit, rates, FX, and commodities. All structures are designed so the maximum loss is the paid premium, balancing risk control and potential returns. Some trades offer maximum returns of over 13 times.

Equities: S&P pullback opens up, put spread cost-efficiency stands out

For equities, Goldman recommends buying SPY put spread options.

The report notes that the S&P 500 dropped about 9% from its January peak of 6978 to its March low of 6368, then rebounded strongly to a new high. At the same time, implied volatility has dropped sharply, making options relatively inexpensive, offering a favorable entry point for directional hedges.

Specific structure: Buy SPY May 8 expiry 680/630 put spread, premium $3.80, reference price $699.94. This date covers earnings for about 80% of S&P 500 components, the Fed meeting (April 29), and Nonfarm Payrolls (May 8) as three major catalysts. If the S&P 500 drops to its yearly low by May 8, the max gross return is 13.2 times, breakeven is about 3.4% below current level, Delta about -20%.

Credit: IG spreads to revert, HY technically weakest

For credit markets, Goldman sets up positions in both investment-grade and high-yield.

For investment-grade credit, Goldman recommends buying protection on the CDX IG46 index. The report notes that CDX IG widened from 55 bps to 68 bps at the end of March, then fully retraced to 54 bps. As the most liquid macro credit tool, CDX index’s beta to equities can surge sharply under stress, as seen in March. The new Series 46 is particularly attractive as it includes mega-cap cloud companies, with tech making up 12%—if focus returns to AI and related financing, the index could widen significantly, with relatively low holding costs.

For high-yield, Goldman recommends shorting the HY 100 physical bond basket. The report notes that US dollar high-yield bonds are the weakest sector in credit by technicals, with persistent fund outflows over the past six months, the only sub-market to see net outflows. HY cash spreads are now at the 5th percentile since 2007, offering asymmetric risk protection, ideal for worsening growth or return of credit risk. Specific action: Sell $100 million GS UCH100 basket, buy $91 million duration-matched US Treasuries, strip out rate exposure via swap, purely long on spread widening.

Rates: Front-end receiver spreads regain appeal

In rates, Goldman recommends buying front-end receiver spreads.

The report notes after a recent round of hawkish central bank meetings and rate market deleveraging, the market prices in just 8 bps of rate cuts this year, less than two cuts over three years. However, Goldman thinks the bar for hiking remains high—the current labor market does not support raising rates to suppress inflation sources.

If rates fall sharply within the next year, it will likely be led by the front end, as labor markets will drive this shift. Goldman points out current rate vol is now near pre-conflict levels, making receiver spreads valuable entry points. The report recommends longer-duration 1-year and 2-year expiries: if geopolitical conflicts persist, oil stays elevated near-term, prompting the Fed to stay put until inflation improves, this structure would also work.

FX: GBP may be most vulnerable currency to energy shocks

For FX, Goldman is bearish GBPUSD, recommending to buy GBPUSD binary put options.

The report provides three reasons: First, long-dated oil and gas prices remain firm, and in 2022 repricing pushed GBPUSD down about 22%, far beyond the 70 bps YTD drop—downside risk remains. Second, the Bank of England is priced for two hikes this year, but youth unemployment is near 15%; if energy price shocks require hikes to curb inflation, recession risks rise. Third, UK is more dependent on natural gas than peers in Europe, has highest industrial electricity costs, and with high financing costs, sustained energy shocks could bring fiscal sustainability concerns again.

Additionally, GBPUSD implied vol is below pre-Iran crisis levels; binary option strike skew is attractive historically, offering a good entry window.

Specific structure: Buy GBPUSD Dec 18 expiry, strike 1.235 binary put, about 10% USD option premium, reference spot 1.35, max gross return 10 times, loss capped at paid premium.

Commodities: Food prices lag, upside in ags not fully priced

For commodities, Goldman recommends buying call spreads on the BCOM Grains Index.

The index comprises corn, soybeans, and wheat futures, and has given back most of its March gains, up only about 1% since the conflict began. The report argues the lag in grain prices is because: before the conflict, farmers had mostly stocked up fertilizer for this season, so short-term demand hasn’t much impact yet.

However, the report notes that about 50% of the world’s urea (key nitrogen fertilizer) passes through the Strait of Hormuz. Even if it reopens tomorrow, it will take months for prices to normalize. If fertilizer prices stay high before summer, as US farmers place 2027 orders, corn acreage could drop from about 95 million to 80 million acres, tightening supply-demand to push prices sharply higher.

Specific structure: Buy BCOM grains index 9-month 34.25/39 call spread, premium 0.82, reference price 31.20, with $5 million premium max return about 6 times, loss capped at premium paid.

Risk warning and disclaimerMarkets are risky, invest with caution. This article does not constitute individual investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are appropriate for their particular situation. If you invest based on this, you bear your own risk. ```