Options Traders Wrestle With Stocks’ Muted Reaction to War Risk

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.

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%.