Insights 
VT 
US stock markets experienced turbulence on Tuesday due to rising tensions between the US and Iran. The volatility followed President Trump’s statement demanding ‘unconditional surrender’ on Truth Social.
The market saw a gradual increase in selling activity throughout the day, erasing gains made from Monday’s rally. The S&P 500 fell by 0.8%, losing 50 points. The Nasdaq decreased by 0.9%, while the Russell 2000 dropped by 1.0%. The Dow Jones Industrial Average (DJIA) was down by 0.7%, and Canada’s Toronto TSX slipped by 0.2%.
Market Sentiment Shifts
This pullback comes after a relatively optimistic Monday, where gains gave the impression of stabilisation following a choppy start to the month. But yesterday’s price action made it clear that any optimism remains fragile. Traders responded swiftly to comments made by the US President, who used a social platform to issue demands that ratcheted tensions higher. The tone and timing of the statement appeared to catch markets off guard, shifting sentiment from cautious optimism to active risk management.
From our vantage point, the broad-based decline across several major indices is more than a simple reaction to headlines—it underscores heightened sensitivity to geopolitical events. The downtick in small-cap stocks, as reflected by the Russell 2000’s underperformance, indicates hesitation toward risk exposure in domestically focused equities. When we see this type of divergence, it often reflects a more defensive allocation pattern.
VIX futures, closely watched as an indication of expected volatility, edged higher during the last hour of trading. That late-session move hints at positioning that remains defensive ahead of further geopolitical developments. We observed volume rising into the close—this suggests participation wasn’t limited to intraday reaction but extended to institutional adjustments. There’s little evidence to show buyers stepped in at any point with conviction.
From a pricing perspective, several weekly index options now show elevated implied volatilities, particularly in expiry dates straddling the next two Fridays. This typically reflects demand for protection, which doesn’t subside easily unless volatility is decisively reversed. In short, we’re not seeing the kind of mean-reverting selling that disappears in a day; momentum was established, and dealers remain on their back foot.
Shifting Market Dynamics
Powell’s recent remarks (delivered over the weekend), which initially seemed dovish, faded from investor focus as geopolitical risk returned. The rates market backed off briefly in response to rising equity stress, with the 2-year Treasury yield falling a few basis points. But these moves were measured, suggesting that bond traders don’t yet anticipate a disorderly unwind.
For us in the derivatives space, what stands out is the changing skew in SPX options. Put premiums have widened relative to calls at the same strike distance, particularly in the 1 to 2-week maturities. That type of repricing is rarely random; it tells us hedging flows increased. Whenever demand for downside protection accelerates across multiple expiries, it often leads to tighter dealer hedging requirements. That, in turn, tends to amplify short-term volatility unless offset by broad inflows.
Another area we followed closely yesterday was ETF options tied to high-yield credit. There were blocks of downside put purchases early in the session, which we interpret as positioning either for credit spreads to widen or simply as a vote of no-confidence in higher-risk corporate issuers. This backs up the visual cues from equity weakness: there wasn’t one theme leading; risk was pulled across the board.
The upcoming CPI print, scheduled for next week, is another event now exposed to additional volatility, not just from central bank uncertainty but also increased geopolitical friction. A surprise here—either positively or negatively—may carry more weight than usual, especially if it coincides with another round of public rhetoric.
As we consider how to navigate this, there are immediate technical levels worth tracking, most of which broke late in the Tuesday session. S&P futures have now moved below their 20-day moving average for the first time in over three weeks. While not normally a major signal on its own, when combined with increasing volume and a rise in short-dated put open interest, it forms a cluster of potential pressure points.
Options volume in large-cap tech names also rose, with an outsized number of short-dated bearish bets. These weren’t casually sized. Some were repeated within minutes, suggesting either rolling of hedges or directional conviction among larger players. While this doesn’t necessarily imply a sustained downturn, we interpret it as growing concern about sector-specific risks—and it reinforces the trend across broader indices.
To be responsive during this phase, we believe volatility-adjusted positioning is essential. That means tracking gamma exposure on key expiries, refining strategies that balance conviction with flexibility, and remaining alert to repricing across correlated assets. Timing remains uncertain, but flows reveal where pressure is building.
