By Steven M. Sears
Earlier this year, many hedge funds bought inexpensive index options in anticipation that the S&P 500 would hit 8000 by January.
When we noted the trades in early February, the call buying seemed like the kind of "win big, lose small" speculation the 2-and-20 crowd makes with client money. Now the trades look sagacious, as 8000 seems attainable.
Despite the Iran war, elevated oil prices, inflation, recessionary fears, and worries that the artificial-intelligence boom has created a stock market bubble, stocks keep going up. As a famous economist infamously noted in 1929, they seem to have reached a permanently high plateau.
Corporate earnings are strong. Executives have seemingly learned how to expand profit margins regardless of economic noise, in part by raising prices to customers who cannot live without their products. Corning's optical fiber products, for example, are integral to AI data centers, a stunning turn of events for a company founded in 1851.
The insatiable demand for stocks and options -- which produce effortless profits -- is driving record trading volumes. Some market-making and proprietary-trading firms are making tens of billions of dollars, a feat historically reserved for only the largest corporations.
Against this capitalistic -- dare we say orgiastic -- cornucopia, Goldman Sachs' portfolio strategists recently increased their year-end S&P 500 target to, you guessed it, 8000.
The benchmark index will get there, Goldman counsels, thanks to strong corporate earnings and other bullish factors. The bold prediction raises an interesting issue, insofar as investors must ponder what will happen to the market after an influential bank tells clients to prepare for higher all-time highs.
It is likely that stocks advance if enough investors heed Goldman's advice or the Iran war ends, but this is a momentum-based market, and such markets have a special risk. When hot money stops chasing stocks, they usually decline. Though risks persist, other banks will likely copy Goldman and issue higher price targets, and that should keep many in a stock-buying, options-trading mood.
To secure the extraordinary unrealized profits that define so many portfolios, investors could consider our preferred hedging strategy: ratio spreads. This entails buying a put option and selling two other puts with lower strikes but similar expirations.
With the State Street SPDR S&P 500 exchange-traded fund at $759.57, buying the October $740 put and selling two October $700 puts allows investors to hedge portfolios and positions them to buy stocks lower -- and in fact, often pays investors to hedge. The spread pays investors about $4.30.
The strategy combines a standard spread -- buying one put and selling another with a lower strike -- with selling a cash-secured put, which limits the risk of losing money if stocks advance.
Should SPY decline to $700, the spread's maximum profit is $44.30. Over the past 52 weeks, the ETF has ranged from $585.06 to $760.40. So far this year, it's up 11.4%.
The October expiration covers a month historically associated with major stock declines. The strategy complements another hedging recommendation on SPY we made in May for June expiration with lower strikes.
Ratio spreads get tricky if stocks continue to advance -- as money spent on the hedge is lost -- or if the ETF falls below the cash-secured put strike. If the latter happens, investors must buy SPY at $700 or adjust the put to avoid assignment.
Hedging requires perfect timing, and that's always hard. The larger issue is simpler: Unrealized gains only become real by selling. For anyone worried about the market, or who relies on the markets for living expenses, think of hedging like home insurance. You may never need it, but you'll feel better if you have it.
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June 03, 2026 02:00 ET (06:00 GMT)
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