As the conflict in Iran extends into its fifth week, strategists from major Wall Street banks are advocating for trading strategies that could yield benefits from a gradual stock market selloff. Recently, BBVA suggested employing April Euro Stoxx 50 Index put spreads, highlighting a sense of market complacency amidst a U.S. troop buildup. Meanwhile, JPMorgan Chase & Co. pointed to movements in over-the-counter volatility “knock-out” puts, which lose their protective value when market fluctuations surpass certain thresholds. Both strategies aim to reduce the cost of hedge positions compared to conventional put options.
Despite the ongoing geopolitical tensions, the immediate macroeconomic impact has largely kept U.S. indexes stable. However, concerns surrounding rising inflation’s effect on central bank policies and disrupted trade flows loom large, posing a risk of an extended selloff that could heighten market volatility. Arnim Holzer, a global macro strategist at Easterly EAB, noted, “The issue now isn’t whether investors are hedged, it’s how.” He explained that many current strategies are designed for a gradual decline rather than significant market regime shifts, potentially leaving investors vulnerable in case of unexpected volatility spikes.
Convexity trades, which are typically profitable during periods of heightened volatility, have seen a decline in popularity given the swift recoveries in recent selloffs, leaving traders with limited opportunities for profit. Currently, the perception that U.S. President Donald Trump has potential avenues to de-escalate the situation keeps strategists from recommending extreme downside protection measures.
JPMorgan’s global head of equities structuring, Arnaud Jobert, mentioned that trades focused on gradual market declines are gaining traction. He pointed out that traders have shown interest in VKO puts, and features like look-back options are being employed to navigate the erratic market conditions.
During a recent stock downturn, while the Cboe Volatility Index surged past 30 for the first time since April, much of this spike was driven by rising demand for S&P 500 Index calls from traders anticipating a market bounce. This marks a departure from early 2025, when some strategists preferred to finance VIX calls with S&P 500 puts. While convexity strategies performed well during certain events, the slow market grind leading up to these has proven challenging for traders.
With the S&P 500 down nearly 9% from its January peak and global oil prices remaining above $100 per barrel, indications emerge that some investors are preparing for a more significant market decline. Antoine Porcheret from Citigroup noted that long convexity equity trades have not entirely fallen out of favor, observing active engagement from institutional investors in low-delta VIX calls, even as implied volatility for these options has surged from 130% to 160%.
Furthermore, investors are increasingly interested in longer-dated options, with volatility trends indicating a rise even amid a climbing equity market. Although these options may not be as responsive to immediate market crashes as shorter-term VIX futures, they are still providing positive carry and some degree of downside protection. Optiver representatives reported a notable uptick in institutional demand for longer-dated volatility.
Jobert recommended that given the high cost of short-dated puts, traders might find better tail hedging options through mid-term volatility positions, which have been performing relatively well.
As President Trump extends the deadline for Iran to comply with demands regarding the Strait of Hormuz, the exchange of missile fire between Iran and Israel continues, alongside involvement from Yemen-based Houthi militants. U.S. gasoline prices are approaching $4 per gallon, while diesel prices surpass those from the previous year, exacerbated by Russia’s invasion of Ukraine, imposing challenges on airlines facing soaring fuel costs.
David Elms from Janus Henderson Group Plc cautioned that a gradual shift could trigger higher volatility levels. He emphasized that sustained high oil prices might lead to a progressive deterioration in the economic framework, potentially prompting analysts to revise growth expectations and lower year-end targets.
