Early Saturday, US President Donald Trump said the United States had begun “major combat operations” in Iran, after Israel carried out pre-emptive missile attacks against Tehran. Iran’s Tasnim news agency reported that the US bombed multiple locations in Tehran.
Israel’s Prime Minister Benjamin Netanyahu said the strikes aimed to remove an “existential threat”. The Israeli army said missiles were launched from Iran, triggering sirens in several areas, and the Israel Defence Force stated Iran had launched retaliatory strikes.
Markets Brace For Risk Off
Israel declared a state of emergency and told citizens to stay close to shelters. Reports said global markets may open the week with a risk-off move, with demand expected to rise for gold, oil, and safe-haven currencies such as the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF).
“Risk-on” and “risk-off” describe how much risk people in markets are willing to take, with risk-on linked to buying higher-risk assets and risk-off linked to seeking safer ones. In risk-on periods, shares, most commodities except gold, some commodity-linked currencies, and cryptocurrencies often rise.
In risk-off periods, major government bonds, gold, and the USD, JPY and CHF often strengthen. Risk-on currencies listed include the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), Ruble (RUB) and South African Rand (ZAR).
With this news, we must prepare for a significant risk-off wave as markets open. We should anticipate the CBOE Volatility Index (VIX), which was trading in a calm range around 18 last week, to surge well past 30, creating major opportunities for those positioned long volatility. Buying VIX call options or VIX futures will likely be the most direct way to trade this market fear.
Positioning For Volatility And Commodities
We anticipate a sharp sell-off in global equities, making long positions in put options on the S&P 500 and NASDAQ 100 particularly attractive. Looking back at the market reaction to the geopolitical shock in early 2022, we saw major indices drop by over 10% within weeks. Given the direct involvement of the US, we could see an even faster decline this time around.
The potential for disruption to oil transit through the Strait of Hormuz means we should expect a significant spike in crude prices. WTI crude futures, which closed Friday near $85 a barrel, could easily challenge the $100 mark in the coming days. When geopolitical tensions escalated in early 2022, we saw crude jump over 30% in less than a month, a historical parallel that supports buying call options on WTI and Brent.
Gold is set to benefit significantly from the flight to safety, so call options and long futures positions should perform well. We saw a comparable rally during the 2022 crisis when gold prices surged from around $1,800 to over $2,050 an ounce. The US Dollar, Swiss Franc, and Japanese Yen are also expected to strengthen considerably, making put options on currency pairs like AUD/USD and EUR/USD a logical hedge.
A key factor for us will be the explosion in implied volatility across all asset classes, which will make buying options more expensive but also highly profitable if directional moves are sharp. The cost of protection will rise, meaning strategies that were cheap last week will now be costly. Selling uncovered options will carry extreme risk and should be avoided until the situation stabilizes.
