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Posted April 7, 2026 at 1:00 pm
Today is potentially momentous. It’s not every day, thankfully, that a world leader threatens that “a whole civilization will die tonight”, but that specter looms over Iran today. Crude oil understandably continued its three-day advance this morning. After ignoring that rally for two sessions, stocks reacted negatively to oil’s advance today. Even so, by noon ET the S&P 500 (SPX) had only fallen back to levels last seen on Thursday morning. Investors once again are more wary of a bounce than an outright decline.
This is a theme that continues to resonate in equity markets. Particularly with the one-year anniversary of “Liberation Day” and the ensuing rally, we hear numerous discussions about why they are optimistic about a quick resolution to the crisis and thus a big pop in stock prices. I even heard one comparison to the immediate post-Covid reaction and why a similar rally could materialize if hostilities end. I’ll explain why I don’t think these are particularly apt comparisons, but first, we can see from the charts below how expectations for a rally have become well embedded in SPX options pricing. In the first graph below, note the steep skews for upside options, with shorter-dated options showing the steepest upside skew.
Skews for SPX Options Expiring April 10th (top), April 17th (middle), May 15th, 2026 (bottom)
Source: Interactive Brokers
In the next graph, compare the evolution of skew in options expiring April 17th (regular monthly expiration). Prior to the start of the war, on February 27th, SPX options were almost linear, with a relatively steep downside skew and virtually no bump to the upside. Two weeks ago, we began to see an increase in the implied volatilities of upside options; today we see a nearly symmetrical skew in both directions, though there are many more downside strikes.
Skew of SPX Options Expiring April 17th, 2026 on April 7th (brightest), March 24th (next brightest), February 27th, 2026 (faintest)
Source: Interactive Brokers
The evolution of that upside skew, whether the result of “FOMO Insurance” or outright speculation, is stunning. Seemingly no one was willing to speculate on an upward move; now they are willing to pay up for calls that hedge against a significant rally, and the peak probability for those options prices in a bounce to 6750.
IBKR Probability Lab for Options Expiring April 17th, 2026
Source: Interactive Brokers
While I fully understand the psychological motivations behind this pricing – anyone who missed the post-Liberation Day bounce had a tough time outperforming their benchmark last year – it is useful to compare and contrast the current situation with the prior setups.
I’ll dismiss the post-Covid analogy quickly. Does anyone reasonably expect a massive bout of fiscal and monetary stimuli once this situation resolves itself? We certainly don’t see that in interest rate expectations, and while military spending and rebuilding can be stimulative, I don’t expect stimulus checks anytime soon after this situation ends.
As for a comparison to last April, two key differences stand out. First, a set of tariffs can be changed with the stroke of a pen, but a massive buildup of ships and capacity disruption can take weeks or much longer to resolve. Too many key products – oil, LNG, fertilizer, helium, etc. – are tied up in the Persian Gulf, in storage facilities, and/or suffered damage to facilities that produce them. This can’t be resolved as quickly. Second, we simply haven’t fallen as far as we did last year. Remember, SPX was flirting with a 20% decline at its worst; we only flirted with a 10% drop recently. It is difficult to expect a bounce of the prior magnitude when the drop has been about half the earlier fall.
On a human level, I certainly hope that the Iran War is resolved quickly and with as little further damage to people and property as possible. On a stock market level, while that optimism is palpable, it may be overstated.
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It can only go higher. There is no other viable market/military option.
There is a difference between gambling and risk taking. Clearly, all gambling involves an element of risk, but not all risk taking is a gamble. When you step out of bed in the morning, you are exposing yourself to all sort of calamities that could befall you that day, but calling stubbing your toe, failing to catch the bus, or making a fool of yourself at work, are not “gambles” in the normal sense of the term. “Gambles” are event driven, in that once the outcome is determined the result is an all or none matter. The risk incurred by getting out of bed is not resolved by avoiding any particular set of occurrences; it only resolves when you return to the safety between the sheets. Okay, yes I understand bad things can happen in bad, but in that sense, all life is a risk, but not all life is a gamble. Now, to the current situation in the Mideast:- I doubt that anyone has a clear insight as to how this will resolve. There are too many different actors who could affect an outcome and there is no agreed upon resolution at everyone wishes to bring about. Taking a LEVERAGED position on a specific outcome, which would yield a massive gain or utter destruction, is a position of pure gambling. Taking positions like that is not how I got to where I am today.