Put protection demand hits four-year high, Goldman Sachs trader: Professional investors are preparing for "a certain breakout"

Beneath the calm surface of the market, professional investors are aggressively buying downside protection. Goldman Sachs’ latest data shows that although the S&P 500 has traded within one of the narrowest ranges in history over the past two months, institutional trading behavior resembles responding to an extreme VIX volatility index reaching 35—while the current VIX is only 19. This abnormal divergence suggests a potential imminent breakout in market direction.

Goldman Sachs trader Brian Garrett noted in a weekend report that the latest institutional activity—including selling, shorting, reducing overall and net exposure—appears more like a VIX at 35. The one-month S&P 500 options skew has risen to its steepest level in four years, driven by expensive downside puts and cheap upside calls.

Data indicates that long-term asset managers sold a net $4 billion this week and $10 billion so far this month, marking one of the largest monthly sell-offs in four years. Hedge funds have been net sellers of U.S. equities through prime brokers for three of the past four weeks, with 70% of net sales coming from the technology, media, and telecom sectors. Global equities experienced their largest net sell-off since April 2025 last week, mainly driven by short positions.

This defensive posture is driven by proximity to key technical levels. Goldman Sachs pointed out that gamma turns negative with small declines, coinciding with the trigger threshold of the firm’s CTA momentum strategy. Garrett emphasized this as “extremely important,” implying the market may be preparing to reflect prolonged volatility at the individual stock level.

Index Calm Masks Stock Volatility

The market shows extreme divergence. Over the past two months, the S&P 500’s high-low closing range was only 3.7%, less than half the median of 8.6% over the past 20 years, marking one of the narrowest two-month periods in history.

But at the stock level, the situation is entirely different. Goldman Sachs data shows that the average realized volatility of individual stocks has just broken the highest level in four years, with the average stock’s realized volatility about 25 percentage points higher than the index. Garrett said that while the index has been “boring” enough to describe the past two months, the experience for “soldier in the trenches” investors is quite the opposite.

This divergence is raising alarms among professional investors. Goldman Sachs believes that investors are continuing to reduce risk, “feeling like they are preparing for the index to finally reflect the signals from individual stocks”—meaning “something has to give.”

Institutional Investors Accelerate Exit

Prime broker data reveals a sharp shift in institutional behavior. U.S. stocks were net sold this week, with three of the past four weeks showing net outflows. The technology, media, and telecom sectors accounted for 70% of net sales, with clear sector divergence: funds heavily sold software and internet stocks while buying semiconductors and storage chips.

Despite a week with “nothing happening,” global stocks experienced their largest net sell-off since April 2025, driven by short positions, with long positions inflow relatively modest. Overall trading activity continued to increase, almost entirely driven by short selling. Out of 11 sectors, seven were net sold, with information technology, communication services, financials, and materials leading declines, while energy and healthcare saw the largest net inflows.

Long-term asset managers’ selling was particularly notable. They net sold $4 billion this week and $10 billion so far this month. Garrett noted this as one of the largest monthly sell-offs by asset managers and dedicated longs in four years—other significant months include August 2022 ($18 billion), March 2024 ($14 billion), and March 2025 ($22 billion).

Options Market Turns Defensive

The derivatives market is signaling a clear defensive stance. The S&P 500 one-month options skew is trading at its steepest level in four years, reflecting expensive downside puts and cheap upside calls. A Goldman Sachs trader said:

“We still haven’t seen any demand for S&P 500 upside calls in the trading floor.”

This aligns with the delta positioning of professional investors—options markets are becoming more defensive. Mega-cap tech stocks are no longer “ripping higher,” and retail investors show signs of fatigue in buying upside options. Over the past month, trading volume in upside calls for mega stocks has fallen to levels not seen since 2017. Garrett commented:

“When options are no longer effective, chasing upside calls becomes less interesting (investors experience the true meaning of ‘time decay’).”

Futures markets also show signs of fatigue. Goldman’s futures team noted that the momentum of holding cyclicals has begun to wane, with Russell index delta positions being liquidated—once this year’s most favored trade—leading the team to favor short-term tactical outperformance of the Nasdaq 100.

Key Technical Levels Under Threat

Gamma dynamics represent the most immediate market risk. Garrett emphasized that as the market tests the lower bound of this narrow range, gamma will turn negative with even minimal declines, coinciding with the threshold of Goldman’s CTA momentum strategy. He wrote that this is “extremely important.”

Negative gamma means that during declines, market makers and derivatives traders need to sell more stocks to hedge positions, amplifying downward pressure. The evolution of gamma positioning is maturing as the impact of volatility “carry” products increases, surpassing the influence of S&P 500 expirations.

The market is approaching a critical test. Nvidia will report earnings after the close on Wednesday, which could serve as a catalyst for a directional breakout.

Risk Disclaimer and Legal Notice

Market risk is inherent; investments carry risks. This article does not constitute personal investment advice and does not consider individual user objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their specific circumstances. Invest accordingly at your own risk.