Skew malfunction! Goldman Sachs volatility team: A 10% surge and a 10% plunge in US stocks are actually being assigned the same pricing.

Market fear over downside risks has virtually disappeared, and a core pricing mechanism in the options market is failing.

Goldman Sachs derivatives strategist Brian Garrett pointed out in his latest weekend report that the S&P 500 options volatility skew has fallen to an 18-month low, with the market assigning almost identical probabilities to a 10% drop or a 10% rise, both about 8%—a phenomenon directly defined by Goldman’s volatility team as 'Skew Failure'. Meanwhile, the Goldman Sachs Panic Index closed at a single digit, hitting a two-year low, indicating demand for hedging tail risk has fallen to extremely low levels.

This signal emerges against the backdrop of the US stock market’s continued surge. Since the start of this year, the S&P 500 has hit a new record every five trading days on average; after-hours Sunday trading saw Micron’s share price break through $1000 for the first time.

Garrett admits that the team’s internal discussion has evolved from March’s “make it stop” to May’s “is this still rising?”. However, his own stance is shifting from cautious optimism to increasingly pessimistic, with several bearish reasons listed.

Three Major Bearish Signals Emerge: A Rift Between Market Sentiment and Fundamentals

Garrett outlined three primary concerns in the current market.

First, market leadership is extremely narrow. The top ten S&P 500 stocks now make up 40% of the index, and the last four record highs occurred while overall market breadth was negative—a phenomenon never seen before.

Second, themes are highly concentrated. This year, the S&P 500 index excluding AI-related stocks has lagged the overall index by 700 basis points.

Third, price movements are strikingly similar to historical patterns. Garrett notes that the trajectory in 2026 closely matches the price patterns seen in late 1998 to 1999.

Although bearish voices fill media headlines and social media, Garrett emphasizes that such concerns are not reflected in options market pricing—at least, fear of downside risk is nearly absent.

Skew Failure: Downside Hedging Costs Hit Historical Lows

Goldman’s volatility team offers three key observations from the options market perspective.

First, S&P 500 volatility skew is at an 18-month low, driven by two forces: the put wing is unusually cheap, while the call wing is relatively expensive.

Second, the Goldman Sachs Panic Index closed at a single digit last Friday, hitting a two-year low. This index combines VVIX, VIX, Skew, and the two-year percentile rankings of at-the-money volatility.

Third—and most crucial—the market assigns precisely the same pricing probability to a 10% drop and a 10% rise, both about 8%. This means the options market is no longer assigning extra premium for downside risk; the protective function of Skew has essentially failed.

Garrett notes that the direct implication is: for investors seeking correlation risk hedging, current hedge costs are extremely low.

Low-Cost Hedging Alongside Right-Tail Positioning

Based on the above, Garrett offered several specific trading recommendations.

For those optimistic about market rotation and expecting a shift from concentration to dispersion, Goldman recommends buying RSP (Invesco S&P 500 Equal Weight ETF) outperformance options versus SPX; the one-month 100% outperformance option costs about 145 basis points. Also recommended is buying VIX call options as a hedging tool, with August and later term structures extremely flat—VVIX closed at 86.

For investors seeking simple downside protection, Garrett suggests directly buying S&P 500 put options—given the currently very low put skew, the payout structure is quite attractive.

In addition, Goldman also recommends going long Bitcoin ETF volatility with Delta-neutral hedging. Garrett notes that historically, Bitcoin’s behavior resembles a “leveraged Nasdaq,” but current pricing is at a two-year low and about 10 volatility points below SMH.

Capital Flows: Hedge Funds Net Buyers for Two Weeks, Single-Stock ETF Assets Double

According to Goldman’s latest Prime Brokerage data, hedge funds have been net buyers for two consecutive weeks, at the fastest pace this year, mainly reflecting long additions and macro short covering. There’s clear sector rotation: financials (down 6% YTD) saw net buying, while industrials (up 11.5% YTD) faced net selling.

On the futures side, end-user holdings have recovered close to 2024 highs. The Goldman team notes that leveraged ETFs are mechanically expanding their balance sheets; CTA strategies are near neutral allocation, but systematic strategies show distinct left-tail asymmetry—buying about $12 billion in a one-month flat scenario, but selling about $100 billion in a one-month downside scenario.

Notably, global leveraged and inverse single-stock ETF assets under management have surpassed $60 billion, doubling in two months, making this niche segment impossible to ignore.

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