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Derivatives

Goldman Pitches Equity Vol Trade

Goldman Sachs is recommending trades that take advantage of an expected fall in equity implied volatility surrounding imminent earnings announcements. Altaf Kassam, associate in European equity derivatives and trading research, said the firm is recommending a directional and vol trade on AstraZeneca and Unilever. The trades capitalize on the view that implied volatility tends to fall off after earnings are announced by selling volatility. Kassam said Goldman has looked at stocks' implied volatility term structure to imply what the volatility for stocks will be around their earnings date to determine if the heightened implied volatility is justified historically.

In the trades Goldman recommends selling a call on AstraZeneca at a strike price of GBP22.00 and an expiration of Oct. 16 with an implied vol of 52.5%. Also, Goldman is recommending selling a put on Unilever at a strike price of GBP4.60 with an expiry of Sept. 18 and an implied vol of 45.9%.

An equity derivatives analyst at a competing firm said he was surprised to see a bank recommending trading volatility in the current market. He noted that even if implied volatility is high compared to historic volatility, it's hard to confidently say that it will fall. His clients are only looking to reduce exposure and are not interested in putting on speculative trades, he said. "There's no reason to try to be a hero." But Alex Grebnev, analyst in equity derivatives and trading research at Goldman, said there are different types of clients who could look at these trades and that for speculative hedge funds it might be a good time to sell volatility because it is so high on a historical basis.

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