MW As bullish bets surge here's the option play to protect portfolios from a likely pullback, says Goldman Sachs
By Jamie Chisholm
Materials, tech and energy sectors offer an attractive hedging opportunity
An option strategy can be used to protect portfolios from a pullback.
Wall Street heads into the Memorial Day weekend in chipper mood, with the S&P 500 this week shrugging off a mini wobble caused by spiking bond yields to sit just a fraction shy of record highs.
Nowhere is sentiment more ebullient than in the options market, where volumes have surged, driven in large part by the bullish short-term bets of retail investors. Call options give the buyer the right to purchase a stock at a specified price within a particular timeframe, while put options give the buyer the right to sell the stock under the same criteria.
However, such is the heightened appetite for risk that Goldman Sachs thinks it is that derivatives arena that should be used to protect portfolios from likely volatility in coming months.
"Both market sentiment and investors' positioning have increased sharply since the end of March on the back of optimism around a potential end to the Middle East war and strong earnings growth, boosted by AI capex," said a team of Goldman strategists led by Andrea Ferrario in a note published Thursday.
MarketWatch observed last week that Goldman had warned its Risk Appetite Indicator (RAI) has risen to its highest reading since 2021 - the 99th percentile since 1991.
The bank says this alone is not enough to deliver a contrarian bearish signal, but it found that an RAI at such levels does increase the frequency of small stock market corrections.
A surge in bullish positions in equity calls relative to puts since the March S&P 500 trough - which has pushed the relative price of calls higher than is often the case - means the current set-up in the options market offers a way to hedge against such pullbacks, according to Goldman.
The way to do that is through a put spread collar, said Goldman. This options strategy is designed to protect a long stock position from losses, and has three elements.
The investor buys an out-of-the-money (OTM) put to establish a price floor and provide insurance against a heavy share price drop. Then the investor sells an even lower strike OTM put option, with the premium received helping to cover the cost of the first put. Finally, the investor sells an OTM call option to generate premium, but which caps the maximum upside profit.
Read here for an explanation of out-of-the money options.
Goldman ran a screen looking at sectors and markets that have the most elevated call option positioning and therefore are likely to give more bang for the buck for such a trade.
"Among these, put spread collars on U.S. materials, U.S. tech, U.S. energy, and China equities offer a combination of low prices compared with history and max payout ratios of greater than 8 times," said Goldman.
Put spread collars can also protect gains in markets that rallied the most over the past three months, the bank added. The table below looks at put spreads to hedge a correction half the size of those rallies, and shows which calls need to be sold to fund the cost of the put spread.
"Put spreads collars on [the] Kospi KR:180721, Taiwan equity EWT, MSCI Emerging Markets EEM, and Nikkei JP:NIK look attractive from this point of view as the call strikes are high compared with the distribution of past returns." Goldman said.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is a little changed, while oil (CL.1) is up and gold futures (GC00) are trading around $4,524 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7445.72 -0.74% 4.75% 8.77% 27.45% Nasdaq Composite 26,293.10 -1.28% 7.59% 13.13% 38.93% 10-year Treasury 4.555 -4.10 24.80 38.30 3.70 Gold 4520.9 -0.50% -4.32% 4.36% 34.65% Oil 98.82 -6.47% 4.15% 72.13% 60.01% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
Kevin Warsh is due to be sworn in as the new Federal Reserve Chair by U.S. President Donald Trump on Friday.
Workday shares (WDAY) are jumping after the software company's earnings surpassed Wall Street expectations. Zoom Communications stock (ZM) is also bouncing, after the video-conferencing group raised its guidance.
Estee Lauder shares $(EL)$ are higher after the cosmetics group abandoned a merger with Spain's Puig.
U.S. economic data due Friday include the final reading of consumer sentiment for May, and the April leading economic indicators report, both released at 10:00 a.m. Eastern.
Fed governor Christopher Waller will give a speech at 10:00 a.m.
Bond markets will shut at 2:00 p.m. Eastern, and will be closed, along with the stock market, on Monday for Memorial Day.
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May 22, 2026 06:53 ET (10:53 GMT)
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