President Donald Trump said the bombing of Iran could continue for weeks, in a 21:00 EST address on Wednesday. He used the phrase “back to the stone age” and did not set out a plan to reopen the Strait of Hormuz.
US shares fell on Thursday morning, with the NASDAQ Composite down more than 2% and the S&P 500 and Dow Jones Industrial Average down 1.5%. The drop ended a two-day rally, during which the NASDAQ Composite rose 5% between Tuesday and Wednesday.
Markets React To Escalation
WTI crude oil jumped 11% to $111.20, with US oil futures also cited at $111. Gold fell over 3%, and long-dated US Treasury yields rose.
The Wall Street Journal reported new US tariffs of 25% on finished products made with imported steel and aluminium. The 25% rate would apply to the full value of a finished product, while an existing 50% tariff remains for items made almost entirely of steel and aluminium.
The report said growth stocks fell after the rise in oil, which was described as the highest level since 8 March. It also cited NASDAQ levels of 20,690, 20,500, 19,350, and an 18,000-18,500 gap.
We are seeing a significant spike in market volatility, with the CBOE Volatility Index (VIX) surging past 35, a level not seen since the banking stresses early last year. This environment means options premiums are high, reflecting increased fear and the potential for large price moves in the coming weeks. Traders should prepare for wider price swings and factor the high cost of options into any new positions.
Positioning For Further Downside
With the hawkish turn on foreign policy and tariffs, we are positioning for further downside in the major stock indices. Buying put options on the NASDAQ-tracking QQQ ETF is a direct way to hedge against the impact of high oil prices on growth stocks. We will be watching the 20,500 support level, an area where buyers stepped in during the summer of 2025.
The spike in crude oil to $111 a barrel is a clear signal to be bullish on energy, as no plan to secure the Strait of Hormuz has been presented. We have seen similar supply shocks in the past, such as during the initial phases of the 1990 Gulf War, which led to a sustained rally in oil prices. Long call options on energy sector ETFs provide direct exposure to this ongoing geopolitical risk.
The new tariffs on finished goods will likely pressure manufacturing and industrial companies, similar to the market reaction we observed during the tariff turmoil in April and May of 2025. This creates opportunities for pair trades, such as going long defense sector stocks while simultaneously shorting industrials sensitive to input costs. We expect this theme to play out for as long as the aggressive trade stance continues.
The NASDAQ chart is flashing a warning sign as the 50-day moving average rapidly approaches the 200-day average, threatening a bearish “death cross” signal. While gold’s drop is unusual in a crisis, it appears linked to the sharp rise in Treasury yields, making the non-yielding metal less attractive for now. This could be an opportunity to sell out-of-the-money puts on gold ETFs, collecting the high premium while betting the panic selling is overdone.
