Goldman says the stock market is about to go on a wild ride and suggests a trade to capitalize on the volatility

Published Mon, Sep 18 20232:08 PM EDTUpdated Mon, Sep 18 20233:19 PM EDT

Goldman Sachs expects the stock market is about to get even bumpier from here — and recommends ways for investors to capitalize on the turbulence. "We expect volatility to increase over next few weeks," John Marshall, head of derivatives research at the firm, wrote Monday. October has been a choppy stretch for markets historically, according to Marshall. Since 1928, realized volatility in the S & P 500 was 25% higher in October compared to other months as companies come under pressure to deliver on year-end expectations during the crucial earnings season. That choppiness has become more pronounced in recent decades, especially in the years 1997, 2002, 2008 and 2022. Last October, the 1-month implied volatility in the S & P 500 rose to 30 from 25, the firm said. "While some consider it a coincidence that major market corrections have occurred in October, we believe performance pressures for company managements (to meet full year expectations) and investors (final earnings catalysts for their performance year) exacerbate shifts in investor sentiment at this time of year," Marshall wrote. He recommends investors buy VIX October calls to hedge the risk of rising volatility. While the CBOE Volatility Index, or VIX, a popular measure of volatility, is down about 35% in 2023, the Wall Street firm expects that a deteriorating macroeconomic backdrop and seasonal volatility will drive it up. The CBOE Volatility Index was last hovering around 14. "Buy CBOE Volatility Index (VIX) Oct monthly expiry $15 calls to hedge potential rise in volatility," the firm's Arun Prakash wrote in a Thursday note. "Our volatility model which is based on five economic factors suggests that VIX will average 20.6 in October based on our economists' forecast compared to 13.5 now. In addition, VIX tends to rise into October historically, driven by seasonality," Prakash added. Meanwhile, Marshall added that option buyers should focus on stock names and sectors with fundamental catalysts. — CNBC's Michael Bloom contributed reporting.