Dow Jones futures rose 2.32% to near 47,900 during European hours on Wednesday. S&P 500 and Nasdaq 100 futures gained 2.49% and 3.19% to near 6,820 and 25,150.
US stock futures moved higher after US President Donald Trump said he would pause bombing Iran for two weeks. Trump said the ceasefire depends on reopening the Strait of Hormuz, and a White House official said Israel also agreed.
Markets React To Ceasefire Pause
An Iranian official said talks with the United States will take place in Islamabad, Pakistan. The aim is to finalise details within 15 days, with a meeting due to start on Friday and possible extension by mutual agreement.
In regular US trading on Tuesday, the Dow Jones fell 0.18%. The S&P 500 rose 0.07% and the Nasdaq 100 rose 0.9%.
The ceasefire reduced oil prices, which eased inflation pressures. This also lowered expectations of a hawkish Federal Reserve stance.
Chicago Fed President Austan Goolsbee said rising oil prices could trigger a stagflationary shock and bring back inflation. New York Fed President John Williams said the Iran conflict is likely to push headline inflation higher.
Volatility Likely To Fall Further
With the US-Iran ceasefire announced, we should see a significant crush in implied volatility across the board. The CBOE Volatility Index (VIX) will likely fall sharply from its recent highs, similar to how it receded after spiking above 35 during the geopolitical shocks we saw back in 2022. This creates an environment where selling premium, such as shorting puts or put spreads on the S&P 500, becomes an attractive strategy to capitalize on both a rising market and falling fear.
We should consider going long on equity indices, particularly the Nasdaq 100, which is already showing the most strength in futures trading. Lower oil prices reduce inflation fears and take pressure off the Federal Reserve, making growth-oriented technology stocks much more appealing. Using call options or bull call spreads on major indices can provide leveraged exposure to this relief rally over the next couple of weeks.
The reopening of the Strait of Hormuz is a major bearish catalyst for crude oil prices. We remember how WTI crude futures shot past $120 a barrel during the onset of the Ukraine conflict in early 2022, and we should expect a significant move in the opposite direction now. Traders should look at buying put options on crude oil futures to bet on prices falling back toward their pre-conflict levels.
However, we must remember this ceasefire is temporary and conditional, with high-stakes talks only beginning on Friday. The current drop in volatility makes it much cheaper to buy protection against a potential breakdown in these negotiations. It may be prudent to use this window of calm to purchase longer-dated put options, perhaps for a month or two out, as a hedge in case tensions flare up again.
