(Bloomberg) -- The U.S. options market is showing increasing investor concern about a stock-market sell-off next year, driven at least partially by the looming presidential election, according to Goldman Sachs Group Inc.
“As investors consider the outcome of the election, the distribution of S&P 500 levels implied by the options market at year-end is wide,” strategists including David Kostin wrote in a note Monday. While options pricing currently implies a 22% probability the S&P 500 ends next year above 3,400 -- an 8% gain -- it also shows a 28% chance the index finishes below 2,600, a 17% slump, they said.
A gauge of demand for downside protection known as skew, which rises when bearish put options become more expensive than bullish calls, has climbed above its historical average for one-year maturities, according to data compiled by Bloomberg.
Recent weeks have seen a number of prominent investors including Paul Tudor Jones and Leon Cooperman warning of the risk of a market sell-off should Democrat Elizabeth Warren or Bernie Sanders emerge victorious. Such predictions tend not to have a good track record and others such as RBC Capital Markets think the concerns are overdone.
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Goldman said it is making no prediction on the outcome of the presidential race, and Kostin has a target of 3,400 for the benchmark U.S. stock gauge by the end of next year.
Option skew over different maturities suggests investors are more worried about the run-up to the election than its aftermath, with the measure higher for September and October than for November and December, Goldman said.
“This likely reflects investors positioning for a post-election relief rally once November uncertainty has been resolved,” the strategists wrote.
To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Ravil Shirodkar
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