Dow Jones futures fell 0.62% to below 49,350 during European hours on Monday ahead of the US open. S&P 500 futures slipped 0.49% to near 7,120, and Nasdaq 100 futures dropped 0.47% to about 26,700.
US stock futures declined as risk aversion increased following renewed US–Iran tensions. Iran’s state news agency IRNA said Tehran refused to resume talks with US officials, citing “unrealistic expectations” and other concerns.
Iran has blocked the Strait of Hormuz after a brief reopening. This followed US President Trump refusing to lift port blockades.
Trump said on Truth Social that US representatives will travel to Islamabad on Monday for negotiations with Iran. He also criticised Iran’s move to re-close the Strait and repeated threats to target Iranian infrastructure, including power plants and bridges.
Expectations of Federal Reserve rate cuts eased as inflation remained persistent, with energy prices elevated amid Middle East tensions. Last week, the Dow Jones rose 3.19%, while the S&P 500 and Nasdaq 100 gained 4.54% and 6.84%, with both benchmarks reaching new record highs.
Fed Governor Christopher Waller said the job market’s break-even rate is likely near zero. San Francisco Fed President Mary Daly said she is assessing whether rising oil prices are feeding into wider goods and services inflation.
With futures pointing to a sharp drop, we should consider hedging our long equity exposure after last week’s rally. Buying put options on the S&P 500 and Nasdaq 100 offers a direct way to protect against further downside in the coming days. This move prepares us for the immediate uncertainty stemming from the Middle East.
We are seeing a classic setup for a spike in market volatility. Geopolitical shocks, similar to what we observed at the start of past conflicts, historically cause the VIX to surge from calmer levels. We should look at VIX call options or options on volatility ETFs to profit from this expected rise in fear.
The renewed closure of the Strait of Hormuz directly threatens roughly a fifth of the world’s daily oil supply, creating a significant upside risk for energy prices. We should anticipate crude oil futures to climb, just as they did in early 2022 when prices jumped over 30% in just a few months. Call options on energy sector ETFs look particularly attractive right now.
Persistent inflation, now at risk of being fueled by these higher energy costs, reinforces the Federal Reserve’s “higher-for-longer” stance on interest rates. This situation mirrors the challenges we faced back in 2022 and 2023, where stubborn inflation continuously delayed any policy pivot from the Fed. As a result, we expect growth-oriented sectors like technology to face significant headwinds.
The escalating rhetoric between Washington and Tehran will likely channel investment flows into the defense sector. We can expect stocks of major defense contractors to outperform the broader market in this tense environment. Call options on these specific names or on defense-focused ETFs could offer targeted exposure to these tensions.
For those of us who anticipate a decline but want to limit upfront costs, a bear put spread on indices like the SPX is a prudent strategy. This approach allows us to capitalize on a downward move while defining our risk from the outset. It is a measured response to a market that just came off fresh record highs last week.
