Traders Dive Into Options Market as Geopolitical Risk Flares

“Any time there is geopolitical escalation investors are going for risk-off investments” such as gold, said Phil Streible, chief market strategist at Blue Line Futures. Investors may expand and move to silver too, according to Streible.

STOCKS

The latest flare-up in Middle East tensions had the expected impact on equity volatility markets, with the front-month Cboe Volatility Index future taking a strong bid.

However, market players have become accustomed to volatility, and moves related to geopolitics tend to fade quickly when de-escalation rhetoric starts. And even with stocks down late on Friday, the drop of more than 1% in the S&P 500 Index will do little to stem the contraction in realized volatility, either on an intraday or closing basis. So long as markets continue to have a playbook for the latest headline risk crisis, owning volatility may continue to disappoint.

“Usually geopolitical events create a knee-jerk reaction that doesn’t have much of a lasting impact, unless there’s some very specific reason,” said Benn Eifert, managing partner and co-chief investment officer at QVR Advisors. The equity volatility reaction was “not that big of a move and it will probably dissipate,” he said.

US Dollar

While the dollar hit a three-year low on Thursday, ahead of this week’s Federal Reserve rate decision options positioning already showed signs that the decline was running out of steam. The attack did little to change that.

One-month implied volatility on the Bloomberg Dollar Spot Index has been trending lower since early April, and risk reversals Friday were the least bearish since April 9.

The resurgence of geopolitical risk comes on top of domestic unrest in parts of the nation and uncertainty over the impact of US economic and trade policies on the economy.

“The events overnight in the Middle East are diverting attention away from immigration protests in the US, trade policy/wars and the focus on the Senate’s OBBBA,” said Nicky Shiels, head of metals strategy at Geneva-based MKS PAMP SA.

--With assistance from Elise Harris, George Lei, Yvonne Yue Li, Christian Dass, Alex Longley and Bernard Goyder.

(Updates oil calendar spread positions in eighth paragraph.)