Christian Dass

Sun, Jun 22, 2025, 7:30 AM4 min read

(Bloomberg) — The stock market’s recent calm in the face of rising geopolitical threats had left options traders with a conundrum: sell volatility and risk being blindsided should the Middle East conflict escalate; or buy it and bleed away premiums as actual moves stay subdued. That tension is set to ratchet even higher after the US attacked Iranian nuclear sites.

Most Read from Bloomberg

• Bezos Wedding Draws Protests, Soul-Searching Over Tourism in Venice

• One Architect’s Quest to Save Mumbai’s Heritage From Disappearing

• JFK AirTrain Cuts Fares 50% This Summer to Lure Riders Off Roads

• NYC Congestion Toll Cuts Manhattan Gridlock by 25%, RPA Reports

While the oil market is still likely to have the biggest reaction to the escalating conflict, equities may see an initial jump in volatility as traders try to digest the risks. Oil has surged 11% since Israel launched airstrikes on Iran a little more than a week ago, with crude volatility soaring to levels not seen since Russia’s invasion of Ukraine in 2022. By contrast, the S&P 500 Index is down just 1.3%.

“Markets will react, but probably still modestly in equity markets,” said Anthi Tsouvali, a strategist at UBS Global Wealth Management. “Investors will also have to think about the impact of higher oil on inflation.”

Some traders may be growing numb to Donald Trump’s flip-flops, or just tired of chasing the headlines: In six months, markets have gone from “Buy America” to “Sell America” to now something murkier. They’ve learned to snap back quickly whenever risks subside — and that could happen again with the latest oil spike, which threatens to keep US inflation higher and slow Federal Reserve rate cuts.

It’s a dilemma facing volatility traders like Gareth Ryan, the founder and managing director of investment firm IUR Capital.

“Selling volatility at current levels inherently carries the risk of a volatility event, but paying out premiums with the expectation of a spike higher in vol also means holding a wasting asset,” Ryan said last week.

For the options market, this environment has led to a muddied picture. On the one hand, implied volatility has dropped significantly from a high two months ago. But on the other, premiums aren’t cheap: The collapse of realized swings on major equity gauges is making them look expensive. As of Friday, the Cboe Volatility Index was near its highest level since April relative to actual S&P 500 volatility. The trend was similar trend for European stocks and Chinese equities traded in Hong Kong.

While the options market was underpricing moves ahead of Liberation Day — making some volatility structures very profitable during the “gamma shock” it triggered — the environment is different now that headline risk has a smaller impact. As the July 9 tariff deadline approaches, some strategists are saying a long gamma positioning is unlikely to yield the kind of bumper profits seen in April.