Expected Spike In Market Volatility
We should anticipate a significant spike in market volatility in the coming weeks. The CBOE Volatility Index (VIX), which is currently hovering around 18, could easily surge above 30 as uncertainty grows. We saw the VIX jump over 25% in a matter of days in early 2020 after similar tensions flared, so buying VIX call options is a direct way to position for this. This news is immediately bullish for crude oil prices due to the risk of supply disruptions. About one-fifth of the world’s oil supply passes through the Strait of Hormuz, making any conflict in the region a major threat to global energy markets. We should consider long-dated call options on Brent or WTI crude futures, recalling how Brent futures surged past $70 a barrel in January 2020 on fears of a wider conflict. Gold is the most obvious safe-haven asset in this scenario. With gold already trading above $2,500 an ounce this year, this new uncertainty provides a strong catalyst for a move towards new highs. Historically, gold has proven to be a reliable hedge during Middle East conflicts, and we should look at call options or futures to gain exposure.Equity And Currency Risk Off Positioning
We must prepare for a sell-off in broad equity markets like the S&P 500. The index dropped nearly 7% in the two weeks following the start of the Ukraine conflict in February 2022, and this situation could provoke a similar risk-off reaction. Buying put options on the SPY or QQQ ETFs is a prudent defensive or speculative strategy. In currency markets, we expect capital to flow into traditional safe havens like the Japanese Yen and Swiss Franc. At the same time, the South Korean Won and Australian Dollar could come under pressure due to the explicit distancing from key Asian allies. A long position in the USD/KRW pair or buying puts on the AUD/USD pair could be effective ways to trade this divergence. Create your live VT Markets account and start trading now.
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