Wall Street touts ‘grill lower’ trades as Iran weighs on stocks

(Bloomberg) — As the war in Iran enters its fifth week, Wall Street banking strategists have been pitching trades that could pay off if the stock market selloff is slow and steady.

BBVA has recently recommended April Euro Stoxx 50 Index put spreads, citing the relaxation of the market even in the presence of a group of US soldiers, while JPMorgan Chase & Co. refers to an over-the-counter “knock-out” feature where the security evaporates if market volatility exceeds a certain level. Both types of strategies lower the cost of option positions compared to buying only vanillas.

The lack of a major economic shock so far has kept the crisis at bay according to US indices. However, the potential impact of inflation on central bank policy and trade disruptions threatens to turn into a major decline, selling long-term to raise long-term volatility.

“The issue is not whether investors are blocked, it’s how,” said Arnim Holzer, global strategist at Easterly EAB. “Most of the infrastructure that’s being used is designed for weight loss, not government change, which leaves the buy side clearly short-changed if there are flexibility gaps.”

Convexity trades – which capture large profits in options during spikes in volatility – have been declining somewhat in line with the pace at which the market has recently moved, leaving traders with less opportunity to capitalize.

“We’ve seen good performance in the lower trades – price levels are generally supportive to try to find a short skew, a short delta,” said Arnaud Jobert, JPMorgan’s global head of strategy and co-head of global strategic indices. “We’ve seen the business with VKO set and even set the latest feature on VKO in order to be dependable within the whipsing market.”

During Friday’s trading session, as the Cboe Volatility Index closed above 30 for the first time since April, a large part of the increase was due to demand for S&P 500 Index calls by traders looking for a rebound, according to Cboe Global Markets Inc.

This marks a change from early 2025, when some analysts were inclined to back VIX calls with S&P 500 puts. Although convexity worked better than Independence Day, the long decline leading up to the event made these trends confusing.

But with the S&P 500 down nearly 9% since the January close and global oil prices holding above $100 a barrel, there are signs that some investors are expecting a sharper, deeper slide.

“The long-term convexity equity markets have not completely taken off,” said Antoine Porcheret, head of institutional planning for the UK, Europe, Middle East and Africa at Citigroup Inc. “This month, the real money has been working in the low VIX models without the right supply facing it,” he said, citing volatility from three months to 160% from 160% from 160% to 160% VIX.

Investors also want to have long-term, flexible long-term options that are increasing in the near term and in a rising equity market. While strategies of this tenor will not be as sensitive as VIX month futures during market downturns, the business has still achieved good performance with a low hedging position. Optiver traders last week noted the increasing demand from institutional investors for long-term stability.

“Latest, lower garments are more expensive to carry at the moment, so for tails, we prefer to have vega from the middle of the curve, which is very good,” said Jobert.

As Trump extended the deadline for Iran to agree to reopen the Strait of Hormuz or face attacks on its energy infrastructure, Iran and Israel continued to exchange missile fire and Yemen’s Houthi fighters entered the conflict. US gas pump prices are close to $4 a litre, while diesel is higher than ever this time in 2022 after Russia invaded Ukraine and airlines are struggling to cope with rising jet fuel costs.

“There may not be enough fear to push the reign of uncertainty higher,” said David Elms, head of diversification at Janus Henderson Group Plc. “Six months of $100 oil is a very strong ‘boiling frog’ – it gradually destroys the data base and eventually forces analysts to reduce growth forecasts and lower year-end targets.”

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