Yo pit crazies,
I was dead wrong yesterday. The news was out, but Iran isn't giving up the ghost. What looked like a quick operation, regime change, call it what you will, is dragging on. As Frank Gregory said, Iran is like a dying dog nipping at anything. And now it's biting hard.
Iran launched retaliatory strikes against every member of the Gulf Cooperation Council over the weekend. Missiles and drones hit airports, ports, and oil infrastructure across the UAE, Saudi Arabia, Qatar, and Oman. This isn't contained. This is regional.
Stocks held up as well as they could yesterday. SPY actually clawed back most of its losses by Monday's close. Today? Different story.
The S&P 500 dropped 2.34 percent. The Dow fell 2.48 percent. The Nasdaq slid 2.41 percent. Small caps got crushed with the Russell 2000 down 3.71 percent. Japan's Nikkei cratered 6.65 percent overnight. That tells you this isn't just a U.S. problem.
This is why I hedge
The VIX surged 23 percent to 26.43, its highest level in over three months. That puts us firmly in Zone four territory. When VIX trades above 25, the options market prices in roughly a 1.5 percent daily move in the SPDR S&P 500 ETF Trust (SPY) over the next 30 days. That's real fear, not noise.
Here's the mechanism. Buyers pulled back. The normal flow of sellers found no willing buyers and down goes SPY. Market makers widened their spreads because they can't lay off risk. Every sell order hits harder. That's a liquidity vacuum, and we're sitting in one right now.
1 year chart for VIX
The Strait changed everything
Early calls on the Strait of Hormuz disruption looked premature. Not anymore.
Iran's Revolutionary Guard declared the Strait closed and threatened to set fire to any ship that tries to pass. Tanker traffic dropped 70 percent almost immediately. Over 150 ships sit anchored outside the Gulf waiting for safety guarantees that don't exist.
Then the insurers bailed. Gard, Skuld, and the London P&I Club all pulled war risk coverage for vessels in the region. Without insurance, ships don't sail. Period.
The numbers tell the story. The Strait handles roughly 20 percent of the world's daily oil supply. Brent crude spiked to $83.58, up 7.5 percent. Supertanker freight rates from the Middle East to China hit an all-time record of $423,736 per day, nearly double Friday's close. Maersk, Hapag-Lloyd, and CMA CGM all suspended Hormuz transits.
Barclays warned clients that Brent could hit $100 per barrel. UBS said $120 isn't off the table if this persists. Some analysts compare this to three times the severity of the 1970s Arab oil embargo.
China can't fix this either. Beijing buys more than 80 percent of Iranian oil exports, but Chinese-flagged vessels are about the only ones still showing up. India, Japan, and South Korea account for roughly 70 percent of all crude flowing through Hormuz. They're exposed and they know it.
This situation keeps flowing. That's why VIX traded 27 intraday.
How I'm thinking about VIX from here
The higher VIX goes, the bigger the expected move over the next 30 days. Do I think VIX puts are still a buy in the April cycle? Possibly.
VIX mean-reverts. It always has. Every spike since early 2022, April 2025, December 2024, August 2024, the pattern repeats. But I wouldn't buy VIX puts without some upside protection here.
This isn't a tariff scare or a bad jobs number. This is a shooting war with a closed shipping lane. VIX call butterflies price well and let you participate in further upside without paying through the nose for premium.
Zone four is nothing to mess with. Hedge accordingly.
To Your Trading Success,
AG