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Interactive Options Course
Posted March 24, 2026 at 12:55 pm
It is customary, and not incorrect, to divide the investment universe into a low-risk, high-risk paradigm, with volatility being a reasonable proxy for risk. It should surprise no one that on that basis, stocks tend to be more volatile and thus considered more risky than short-term fixed income. Yet this month, we have seen even safer assets become more volatile. As we have asked before, “If a relatively low-risk asset like 2-year notes is getting clobbered, what chance do risky assets have?”
We have seen 2-Year Treasury yields rise substantially since hostilities in the Persian Gulf began on February 28th. The one-month high-low range exceeds 50-basis points thanks to a nearly complete reassessment of the likelihood for interest rate cuts in the coming year. If the market removes two 25-bp cuts from its near-term calculus, it should come as no surprise that 2-year rates will reflect that change.
2-Year Treasury Yields, 4-Months, Daily Candles, with 30-day Moving Average (green line)
Source: Bloomberg
After a move of that magnitude, it should also not be surprising to see the implied and historical volatilities of options on 2-year note futures (ZT) rise accordingly. Implied volatility has more than doubled, 10-day historical has roughly tripled, and 30-day historical is up by about 50%.
4-Months, Implied (white), 10-day historical (yellow), 30-day historical (orange) Volatilities on June ZT Futures Options
Source: Interactive Brokers
Stock traders will undoubtedly find the absolute levels of volatility in the prior example to be laughably low, since they are roughly 1/10 those of the S&P 500 (SPX). But the relative moves, the respective jumps in volatility, are far greater in the less volatile product.
4-Months, Implied (white), 10-day historical (yellow), 30-day historical (orange) Volatilities on SPX
Source: Interactive Brokers
This matters for an important reason. When we first laid out our thesis for why equity (and at the time, crypto) traders needed to become concerned when low-risk assets become risky, we explained it this way:
…it is important to remember that risk-free rates are utilized in nearly every asset pricing model. If you think of current stock prices as the present value of a company’s future cash flows – which I do – then those future values are diminished. Investors are being forced to reevaluate their holdings. That is a difficult process under any circumstances, and incredibly so when a drastic reevaluation must occur in a very short period of time.
If a key pillar supporting equity valuations becomes wobbly, it becomes quite difficult to expect those valuations to remain stable.
Interestingly, the quoted paragraph was written in June 2022. At the time, stocks were plunging because, among other things, the Fed was raising rates to combat the nasty bout of post-Covid inflation. It is easy to forget that while inflation is unpleasant, so is the medication required to purge it from the system. Rising yields throughout the curve reflect concerns that supply shocks, not only in crude oil, but in liquefied natural gas, fertilizers, and even helium, could become pervasive and create price pressures in unexpected corners of the economy.
This is why a quick end to the hostilities is critical. The longer the Strait of Hormuz remains closed, the longer that the prices of these key commodities remain elevated and the greater that they put sand in the gears of the global economy. While it is unrealistic to think that these prices return immediately to pre-war levels, it is sensible to consider the effects of a short-term disruption as largely “transitory”, to borrow a dirty word from the Federal Reserve. The longer the conflict, however, the less transitory and more embedded the effects become. Thus, without some real clarity, one should continue to expect volatility from both safer and riskier assets.
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The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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Trading options on futures contracts involves substantial risk and is not suitable for all investors. Selling (writing) options on futures exposes the seller to potentially unlimited risk of loss, as the seller may be required to fulfill the terms of the contract if the market moves unfavorably. Losses can exceed the initial margin or premium received. Before engaging in short options strategies on futures, you should carefully consider your financial situation, investment objectives, and risk tolerance. You must fully understand the risks involved, including the possibility of losing more than your initial investment. The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) require that you receive and review the Options Disclosure Document (ODD) before trading options on futures. This document explains the characteristics and risks of options trading.
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With the rational assumption that this “Excursion” was stared without an adequate set of plans as to the possible outcomes, it is clear that volatility will prevail as fearless leader “ping pongs” from one reality to another. The concept of planning for the future is not his strong suit, only responding to what he sees as the current crisis. All that being said, at some point there will probably be enough positive earnings reports to cause a return of generally gleeful market of the last several years.
“This is why a quick end to the hostilities is NOT critical… ” Traders need price differential, that’s where the money is. In that way, the direction of the differential is unimportant as long as your machines and algos are on the right side of the trade. If nothing moves, there is no profit to be made – in either direction – and if that happens, eventually, no markets. The reason for the movement/differential is in some ways, irrelevant. In other words, be it geopolitical, “TACOs again?”, or whatever else, the “whys” can wait until after the money moves into the trader’s accounts. Even if it ultimately comes from Joe Average’s 401K that is “forever invested” in the S&P. Sell rallies. Pay the long-term cap gains taxes and call it the cost of doing business with money monsters. Rallies provide a way to get the pro’s money out… *befor*e it hits the fan that we can’t even begin to see starting to spin up.
If the US can not or will not providee security and stability to the region. The gulf states wil either do it themselves or turn to someone else. I think a lot of players are regretting backing the current admin.
There hasn’t been stability in the middle east in centuries. That’s just their culture. Ignoring the headlines is probsbly the best bet
Well articulated, thanks!
“The concept of planning for the future is not his strong suit”… The present is what causes the future… President Biden agreed to hand over $6 BILLION as a part of a hostage deal with Tehran. Shortly after, Hamas, which receives hundreds of millions of dollars from Iran annually, launched an unprecedented and horrific attack on Israel on October 7th. But instead of admitting this mistake and finding a way to claw back the money, the Biden Administration doubled down and minced words, saying that the money was not going to Iran. And that was the lie that was repeated by a Democrat member who said the money is not going into Iran. The lesson here should’ve been that handing over billions of dollars to our enemy will only strengthen them and put our allies in harm’s way. But President Biden, instead, allowed Iran to access an additional $10 BILLION. That is a total of $16 billion Iran can access. …and O-Bummer handed over a billion in cash as well. Trump sent them to hell where they belong. So whatever mild inconvenience this is causing the latte sipping multi-millionaires is not worth commenting on compared to freeing the people of Iran from 47 years of tyranny.
I don’t think that the US has any credibility anymore to preach to anyone around the world about justice and freedom. Those days are gone. It became nothing but the greed and corruption, from Silicon Valley to Washington.
The volume spikes in both oil (Sell off) and the eMini S&P (Extreme spike higher ~200 Points in 5 minutes…$10,000 per contract), 15 minutes before our corrupt antichrist PIG president put his LIES out on Propaganda Anti-Social is the definition of CORUPTION AND MARKET MANIPULATION FOR THE BENEFIT OF THE TEFLON DON’S CRIME FAMILY AND HIS TWISTED MINIONS! MAKE CORRUPTION GREAT AGAIN!!!!
The real zinger: there is likely truth in all the above!
Great read, Mr. Sosnick. Thank you.
We appreciate your positive words, Brett!