As JPM Goes Short, Goldman Says "Never Better Time To Buy S&P Calls"

Shortly after JPMorgan's historically correct forecasters unleashed their "short stocks" prognostication, we joked that if only Goldman would go "long" the S&P500, then the confusion about what is really going on would be eliminated instantly. And so the alarm bells on this bounce should be ringing loud and clear as Goldman just told its portfolio manager clients that "S&P 500 calls are more attractive now than at any time on record."


With JPMorgan "going underweight US equities for the first time in this cycle," Goldman Sachs would like to sell S&P 500 Calls to its portfolio manager clients...

Our model suggests SPX calls are more attractive than at any time on record over the past 20 years.


Specifically, our GS-EQMOVE model estimates there is a 21% probability of a 5% up-move over the next month based on the current levels of S&P 500 Free Cash Flow yield, Return on Equity, ISM new orders and US Capacity Utilization.


However, the options market is only pricing in a 5% chance of such a move. While a 5% up-move is far from guaranteed (there is a 79% probably it doesn’t move up 5%), the options market is pricing less than 1/4th the probably as our model suggests is warranted by the fundamentals.


Call buying in this environment offers strong risk-reward and allows investors to gain upside exposure while limiting risk. Call buyers risk losing the premium paid.

Looking back through time, there were four months when calls were almost this attractive: Jan-2007, Nov-2006, Feb-2001, and Jan-1996. The SPX was up as much as 1.6%, 2.0%, 2.0%, and 4.1% during the months that followed, respectively.


Finally, we note the small print, as Goldman also suggests - though much more quietly - that Puts are also attractive vs. history (85th percentile)


So to sum up: the awkwardly correct forecasters at JPMorgan say it is time to short stocks, and the Gartman-esque Goldman Sachs (1 for 6 in top 2016 trades, got crushed on its gold recos, and just crucified anyone who was short iron ore overnight) would like to sell S&P 500 calls to its clients... Trade Accordingly.