Yo Pit Crazies,

Oil is catching a bid again as traders line up to see what happens next in the Persian Gulf. Brent went through $100 a barrel Wednesday for the first time since July, and the President says crude won't come down until after the midterms.

I think the market is ready to pull the plug on oil anyway. How do I know?

Every time this week ExxonMobil (XOM) catches a bid, it sells off $5.00 from the top. Crude is at $100 and the stock still can't reach its March high above $169. I have XOM puts to close that I somehow keep missing, and I ended up closing the call sides of my strangles (a put and a call sold together, a bet the stock stays in a range) today.

The opportunity is there because the stock moves on any headline.

XOM 10 day chart

Why does one oil stock matter to the whole market? Oil drove inflation all summer, and we have two doozie headlines coming in the PPI and CPI numbers Thursday and Friday. Consensus has August CPI at 3.4 percent, right where July landed, so just seeing those numbers come in line will be a relief.

Traders are still nervous waiting for the numbers. You can learn to trade the daily moves here.

President Trump said Wednesday that Iran is waiting for the election to be over before it makes a move. One thing is certain, and it's why oil is bouncy: the Department of War is getting more aggressive about dragging Iran to the table before the election. It sank five Iranian tankers off Kharg Island overnight, and Iran answered by firing on ships near the Strait of Hormuz and lobbing missiles at a U.S. base in Jordan.

They're leaning on the gas. That higher-stakes game adds to the volatility in oil and in stocks in general, and traders are paying for it.

Traders Are Paying Up for Thursday

After a Friday low for implied volatility (IV, the price traders pay for the next 30 days of options protection), traders bid the options back up going into the PPI number Thursday morning. That's the blue line below in the SPX skew (what traders pay for puts and calls at each strike) moving to the orange line. They bid it up most of the day.

Wednesday Skew-O-Later chart

Traders pay up for options when they're uncertain. It was one of the first lessons I learned as a market maker 35 years ago: bid it up when you don't know. We have a big FOMC meeting next Wednesday too, and Thursday and Friday tell the Fed what it's walking into.

My call: PPI and CPI come in line and the SPDR S&P 500 ETF Trust (SPY) rockets into Friday's close. Earnings growth has been too strong, and that's the unsung story. Second quarter S&P 500 earnings grew more than 30 percent even after you strip out Alphabet's one-time gain, the seventh straight quarter of double-digit growth.

Strong earnings don't push prices up. The war in the Strait of Hormuz does. Thursday's number has to settle which one is bigger right now.

I made my guess.

For those who want to trade these big macro moves, I have a solution for you. I’ll present it this Friday after the State of the Market at 10:30 AM ET.

Hope this was helpful,

Andrew Giovinazzi