Here are the 4 key categories where Goldman sees abnormal volatility going forward:

  • The Dow Jones Industrial Average ETF (DIA) returned 28% last year (on realized vol of 7) yet the options market is pricing in that the ETF generates less than half of the return in 2018 on double the volatility (11% / 14.3%, respectively).
  • High Yield option investors are also pricing in elevated volatility potential, as well as high level of concern, as suggested by elevated normalized put-call skew levels across tenors. As an example, iShares iBoxx $ High Yield Corporate Bond ETF (HYG) returned 6% last year on a realized volatility of 4. The options market is pricing in the potential for the ETF to trade up or down 7% by January 2019 expiration on a realized vol of 7, double the realized volatility of 2017. A similar setup is seen in the SPDR Barclays High Yield Bond ETF (JNK).
  • Consumer Discretionary ETF investors are also positioning for higher volatility in 2018. XLY returned 23% in 2017 on a realized volatility of 8%, generating among the highest Sharpe ratios in our universe. Option investors are pricing in that the XLY returns +/-13% by January 2019, yet realizes a volatility that is 73% higher than what we saw in 2017.
  • Options on Technology focused ETF QQQ and the Technology Select Sector SPDR Fund (XLK) are both pricing in the potential to return substantially less returns in 2018 than in 2017 yet the options market is expecting higher volatility for both. January 2019 $160 straddles for QQQ cost 14%, suggesting the options market is pricing in the potential for the QQQ to close up or down by this amount by expiration. This is substantially less than the 33% return that QQQ posted in 2017 on a realized vol of 10%.

To summarize: “Option investors are pricing in BULLISH views in Energy, Staples, and Financials, but BEARISH High Yield and S&P500. We look to skew as a measure of sentiment, and compare 1yr skew today to levels seen over the past five years.”