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Goldman dishes on profiting from high volatility

Play for lower volatility?

Market volatility has surged in the last three weeks, only to cool off a bit recently. And Goldman Sachs is looking for ways to profit if volatility continues to slide.

In a Thursday note, Goldman's options team focused on "monetizing elevated volatility levels" by examining "potential ways for investors to get long equity but also benefit if the volatility in the market is not as extreme as is already priced in."

There are two ways to do this; both involve selling options. In one strategy, a trader sells a put, which is a contract that grants its owner the right to sell a stock at a given price and time. In the other, a trader who is long the underlying stock sells a call, which is a contract that grants its owner the right to buy a stock at a given price and time.

Both strategies will tend to profit when expected volatility falls; as smaller moves are expected, holding speculative options becomes less attractive, so prices drop.

However, they are a bit different. The seller of a put must be willing to buy the stock at that put price at the time of expiration, even if the shares have fallen well below it. Meanwhile, the holder of a stock who has sold a call must be willing to forgo share gains above that call level—because that's the price at which those shares will be "called away" by the counterparty who purchased the right to buy the stock at that level.

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For the long-stock-and-short-call strategy, also known as an overwrite, Goldman recommends looking to large stocks with high implied volatility that aren't set to report earnings before the options expire. For instance, an overwrite strategy might work will for Netflix, Marathon Oil, Twitter and Alcoa, the note suggests.

Meanwhile, selling a downside put option is most appropriate for stocks that the market appear to be bearish on, but look good fundamentally. These names include Hasbro, Tiffany and MasterCard.