The 2026 investment year is more than half over. The S&P 500 index is already up about 10%, an historically respectable return that might have been higher without the Iran war and stubborn inflation hampering the Federal Reserve's ability to lower interest rates.

Options trading patterns mostly amplify the exuberance toward stocks, with hordes of people addicted to buying bullish call options to gamble on rising prices. So far, it's been an easy trade. The Cboe Volatility Index, or VIX, known as the stock market's fear gauge, displays little fear, which is fitting as the options market long ago abandoned its role of looking skeptically at the financial markets.

To be fair, there is reason to be bullish. Extraordinary corporate earnings, as we and others have noted, have done wonders for stock returns. But the exuberance raises questions about the intensity of the bullish fervor -- and that makes the onset of the coming earnings season critical to the market's trajectory.

Options pricing dynamics suggest trouble if second-quarter earnings reports and corporate outlooks fall short of stellar.

A greed premium is now structurally part of the options market, with the implied volatility of bullish calls exceeding that of bearish puts. Historically, puts were more expensive, as investors buy them to hedge their stock positions. Now few investors hedge because they are afraid of missing out on making money off rising stocks.

The odd construct means aggressive call buying to chase stocks has set a high bar for companies reporting earnings -- especially market-leading stocks.

Put and call skew -- the dynamic relationship between the implied volatility of bearish and bullish options -- is traditionally the purview of professional traders. Yet smaller investors, increasingly focused on using options to amplify gains rather than to manage risk, are now paying attention to it. That suggests stock-price volatility could be up ahead.

Similar logic animated our recent cautiousness when Goldman Sachs raised its S&P 500 year-end outlook to 8000. Once again, we wonder, how much better can it get? Investor positioning is so optimistic that earnings disappointments could cause huge options market changes, which could collide with stocks if panicky investors cut losses and dump their calls.

Because we advocate time arbitrage -- monetizing short-term spikes in options volatility to enhance long-term stock returns -- we want to preposition ahead of any pyrotechnics and market leadership changes.

Long-term investors concerned about a potential stock decline, but who still want to position for a broadening of the rally, can consider a half-and-half strategy: Rather than buying 1,000 shares of stock, buy 500 shares and sell five puts with a strike price just below the market.

With the State Street SPDR S&P 500 exchange-traded fund at $747.71, buy 500 shares and sell five August $715 puts, making the effective cost of the second set of shares about $709.46 each (strike price less put premium received).

If the S&P 500 rallies, the ETF does, too, and investors keep the put premium. If the index declines, investors lose money on the ETF but likely get to buy more at a lower price, which reduces the total purchase price.

The August expiration captures most of earnings season and the July 29 conclusion of the Fed's interest-rate setting committee.

It also covers a seasonal quirk. Senior investors vacation in August and junior staff is left with instructions to maintain the status quo, which often results in a risk-averse market.

Given rising concerns over the faltering dominance of the Magnificent Seven -- Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla -- and the recent strong performance of many other S&P 500 stocks, the half-and-half strategy is a reasonable position for whatever happens next.

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July 08, 2026 01:30 ET (05:30 GMT)

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