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Aug 8, 2018


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Hello. I'm Ben Eisen of the Wall Street Journal, with your market update this morning.
It’s been a quiet morning with a light economic calendar, but we are keeping a close eye on Tesla stock after its big day on Tuesday and Snap and Papa John’s after their earnings reports. U.S. stock futures pointed to an opening rise on Wednesday, and oil traders on will be watching for the weekly petroleum status report from the U.S. Energy Information Administration. 
Plus, markets reporter Gunjan Banerji takes a look at how options traders are positioning for the S&P 500 to take another leg higher.

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Overnight Developments


Options Traders Bet S&P 500 Rally Has Legs

By Gunjan Banerji, options reporter
With U.S. stock benchmarks mere points away from fresh records, some traders are piling into bets that share prices will rally higher and volatility will remain muted.
The S&P 500 and the technology-heavy Nasdaq Composite hit their second-highest closes in history on Tuesday.
Options investors and traders are wagering the gains will continue. They’ve been scooping up bullish call options on the S&P 500, contracts that would pay out if the stock index takes another leg higher, according to Credit Suisse. Call options give the right to buy shares at a later time if they hit a designated price.
An options measure known as skew on the S&P 500 has also fallen, according to Credit Suisse. Skew tracks the cost of bearish options versus bullish ones. When skew falls, it means bearish contracts are getting relatively cheaper.
In other words, traders in recent days have been shelling out for bullish options rather than bearish ones.
Meanwhile, skew remains elevated for exchange-traded funds like the tech-heavy Invesco QQQ Trust and iShares Russell 2000 ETF, known as IWM, according to Credit Suisse. This signals there’s still some fear lurking in the market over tech and small-cap stocks—groups that have been outperformers in the stock market this year.
The recent activity marks a reversion to an environment that dominated much of last year and the early part of this year. Investors abandoned more defensive options positions and hedges and favored bullish options, fearful of missing out on a potential rally. A volatility shock struck markets in February, causing a pause to this trend.
Now, “both the macro and earnings backdrop set up well for [the S&P 500] to grind higher in the near term,” wrote Mandy Xu, derivatives strategist at Credit Suisse, in a note this week.
The majority of U.S. companies that have reported earnings have beat revenue and earnings estimates, according to FactSet. Tax cuts and a robust U.S. economy boosted corporate profits in the three months through June. Employment figures have stayed strong. 
Another bullish sign is in the futures markets.
So-called “short vol” bets—or wagers that market volatility will fall—by investors including hedge funds hit the highest level since November, according to Commodity Futures Trading Commission data as of last week.
A bearish bet on volatility is akin to a bullish bet on stocks, since market turbulence tends to fall as equities drift higher. Short bets on volatility outnumbered long bets by almost three to one, the CFTC data show.

Market Facts

  • The S&P 500 added 0.3% on Tuesday to notch a fourth-straight session of gains. The index now stands 0.5% below its last record close on Jan. 26.
  • The WSJ Dollar Index slipped 0.2% Tuesday, backing away from a 14-month high.
  • On this day in 1896, the Dow Jones Industrial Average, less than three months old, hit the lowest level ever recorded: 28.48, down 30.5% in just 10 weeks.

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