Investors are starting to reach back to the 2022 playbook as tensions tied to Iran ripple through markets, with attention shifting toward the risk of an inflation shock that could reshape how equities trade. The recent rise in oil and natural gas prices is feeding into supply chains, raising the possibility of broader cost pressures beyond energy and pulling focus away from stock-specific themes like artificial intelligence. That shift appears to be compressing the volatility premium between individual stocks and the S&P 500 (SPY), while also weighing on trading volumes as correlations across equities could increase.
So far, market behavior has remained relatively contained compared with past geopolitical shocks. The VIX has stayed below 30 this year, in contrast to periods like 2022 when it moved above that level multiple times following Russia’s invasion of Ukraine and coincided with a 19% drop in the S&P 500 as the Federal Reserve raised rates. Strategists suggest the current setup could evolve differently, potentially leading to a higher baseline for volatility rather than sharp spikes followed by quick reversals. At the same time, the Cboe Skew Index has eased in recent sessions, possibly reflecting the unwinding of hedges as downside moves have remained limited.
Positioning across markets suggests investors are not yet fully committed to a volatility-driven trade. There has been little evidence of a broad shift into short-volatility strategies, indicating that participants may not have conviction that the current Iran-driven window is ready to be monetized. Intraday swings have picked up even as closing volatility remains muted, pointing to a market still driven more by macro headlines than by options dealer flows. Some investors are leaning toward long index volatility and higher intra-market correlation trades, arguing that the current setup could offer more attractive risk-reward if conditions deteriorate, particularly if intraday reversals begin to transition into sustained momentum into the close.