Demand for put protection hits a four-year high, Goldman Sachs traders: Professional investors are preparing for "some kind of breakthrough"

Beneath the surface calm of the market, professional investors are buying down protection with rare intensity. According to the latest data from Goldman Sachs, despite the S&P 500 trading within one of its historically narrowest ranges over the past two months, institutional trading behavior resembles a response to an extreme situation where the VIX volatility index reaches 35—while the current VIX is only 19. This unusual divergence suggests that the market may be on the verge of a directional breakout.

Goldman Sachs trader Brian Garrett noted in a weekend report that the latest institutional activities—including selling, shorting, and reducing total and net exposures—show a defensive posture "more akin to when the VIX is at 35." The skew of one-month S&P 500 options has risen to its steepest level in four years, driven by the expensive downside puts and cheap upside calls.

Data shows that long-term asset management institutions net sold $4 billion this week, with a net sell of $10 billion so far this month, marking one of the largest monthly selling tendencies in four years. Hedge funds have net sold U.S. stocks in three out of the last four weeks through prime brokerage channels, with the technology, media, and telecommunications sectors accounting for 70% of the net sales. Global equities recorded the largest net sell since April 2025 last week, primarily driven by short selling.

The urgency of this defensive positioning stems from the proximity of key technical levels. Goldman noted that the gamma value turns negative with slight declines, coinciding precisely with the trigger threshold of the bank's CTA momentum strategy. Garrett emphasized that this is "extremely important," indicating that the market may be preparing to reflect the intense volatility that has persisted at the individual stock level for some time.

Index Calm Masks Individual Stock Turmoil

The market exhibits extreme polarization. Over the past two months, the closing range of the S&P 500's highs and lows has been just 3.7%, less than half of the 20-year median of 8.6%, marking one of the narrowest two-month ranges in history.

However, the situation is entirely different at the individual stock level. Goldman data shows that the average realized volatility of single stocks has just surpassed the historical high relative to index volatility, with the average individual stock's realized volatility exceeding that of the index by about 25 percentage points. Garrett stated that while the index level's performance over the past two months could be described as "boring," the experience of "investors in the trenches" is completely the opposite.

This divergence is raising alarms among professional investors. Goldman believes that investors are continuously reducing risk, "feeling like they are preparing for the index to eventually reflect the signals released by individual stocks"—meaning "something has to give."

Institutional Investors Accelerate Exit

Prime brokerage data reveals a dramatic shift in institutional behavior. U.S. stocks were net sold this week, with three out of the last four weeks seeing net sales. The technology, media, and telecommunications sectors accounted for 70% of the net sales, showing clear differentiation at the sector level: funds are heavily selling software and internet stocks while buying semiconductor and memory chip stocks.

In a week where "nothing happened," global stocks experienced the largest net sell since April of last year, driven by short selling, while inflows into long positions were relatively mild. Total trading activity continues to increase, almost entirely driven by short selling. Seven out of eleven sectors were net sold, with the information technology, communication services, financials, and materials sectors leading the declines in dollar terms, while energy and healthcare were the sectors with the most net buying The sell-off by long-term asset management institutions is particularly significant. This group net sold $4 billion this week and has net sold $10 billion so far this month. Garrett pointed out that this is one of the largest monthly selling tendencies for asset management institutions and pure long-only institutions in four years—other large sell-off months occurred in August 2022 ($18 billion), March 2024 ($14 billion), and March 2025 ($22 billion).

Options Market Shifts to Defense

The derivatives market is sending clear defensive signals. The skew of one-month options on the S&P 500 is trading at its steepest level in four years, reflecting the high cost of downside put options and the cheapness of upside call options. A trader from Goldman Sachs stated:

"We still haven't seen any demand for S&P 500 call options in the trading floor."

This aligns with the positioning of professional investors' delta positions—the options market is becoming more defensive. Mega-cap tech stocks are no longer "soaring," and retail investors are showing signs of fatigue in buying upside options. Over the past month, the trading volume of call options on mega-cap stocks has dropped to levels not seen since 2017. Garrett commented:

"When options are no longer effective, chasing call options becomes less interesting (investors will experience the true meaning of 'time value decay')."

The futures market is also showing signs of fatigue. The Goldman Sachs futures team noted that the previous rush to hold cyclical exposure is beginning to show signs of exhaustion, with Russell index delta positions being liquidated—this position was previously the most sought-after trade this year—prompting the team to be bullish on the Nasdaq 100 index for short-term tactical outperformance.

Key Technical Levels Under Test

Gamma dynamics constitute the most direct market risk. Garrett emphasized that as the market tests the lower bound of this extremely narrow range, the gamma value will turn negative in a "minimal sell-off," which coincides precisely with the threshold of Goldman Sachs' CTA momentum strategy. He wrote that this is "extremely important."

A negative gamma environment means that when the market declines, market makers and derivatives traders need to sell more stocks to hedge their positions, thereby exacerbating downward pressure. The evolution of gamma positioning is maturing, as the increase in volatility "yield" products has surpassed the impact of S&P 500 expiration dates.

The market is about to face a critical test. Nvidia will announce its earnings after the close on Wednesday, which could serve as a catalyst for a directional breakthrough in the market