The Israel-Iran War

This Time It's Different 

Iran's retaliation ballistic missile strike against Israel late Friday indicated that this conflict was different from anything last year. Unlike Israel's decapitation strikes on Hezbollah, Iran was still standing after eating Israel's first strike. And unlike previous exchanges between Israel and Iran last year, both sides were firing for effect, with bad intentions. By Friday's market close it was clear that this was a real war. 

Energy and volatility markets responded fast:

• Brent crude settled +7 % Friday at $74.23 — its biggest one-day jump since the Russia-Ukraine invasion’s opening week.

• The VIX closed at 20.8 (+15 %). “Elevated,” not “panic” (panic is >35). 

Friday’s hedge — a quick post-mortem

On Thursday I opened a VIX call-spread hedge. I peeled it off in two tranches on Friday for gains of +159 % and +53 %, respectively, before Iran's first ballistic missile strikes landed in Israel. In hindsight I probably should have kept that second slice open, but hindsight is cheap tuition.

What Happens Next 

Questions remain about what Israel's endgame is here. Some have suggested the goal is to spark regime change in Iran, but that seems unlikely to happen. If anything, Iranians are likely to rally behind their current government in the face of Israeli air strikes. 

Others say Israel's goal is to destroy Iran's nuclear program, but It's unclear whether they are capable of destroying Iran's heavily fortified and deeply buried Fordow Fuel Enrichment Plant on their own. Israel has 5,000lbs bunker-buster bombs, but some analysts speculate this site might require the 30,000lbs GBU-57/B bunker-busters, and Israel doesn't have any bombers that can carry that. The only bomber we know can carry it is the B-2 Spirit stealth bomber, and no country other than the U.S. has that plane. 

Some Israel supporters, such as hedge fund manager Bill Ackman, have called for the U.S. to bomb that plant. 

But President Trump has said the U.S. will only strike Iran if Iran attacks U.S. assets first, and has suggested diplomacy as a way to end the war. Of course, one risk of the U.S. getting involved in this war is that Russia or China might decide to supply Iran with arms and intelligence against us, the way we have with Ukraine against Russia. If Russia gave hypersonic Zircon anti-ship missiles to Iran, they could potentially sink a U.S. aircraft carrier. 

Let's consider some plausible paths forward and how likely each might be. 

Six plausible paths from here

Scenario (next 1–6 weeks)	Rough odds	Tape you’d expect
Brokered stand-down (U.S./Gulf shuttle diplomacy)	40 %	Oil drifts back < $80; VIX <18; risk pops
Direct fire pauses, proxy war simmers (Houthis)	25 %	Oil mid-70s; VIX 18-23 chop; defense bid
U.S. one-off strike → “mission accomplished”	15 %	Vol spike >25 then quick fade
Protracted U.S.–Iran fight w/ Russia-China aid	15 %	Crude > $100; VIX > 30; risk-off
Regime change (Tehran or Jerusalem)	5 %	Path-dependent; optionality wins

What’s not priced-in yet

• Crude is still below January’s highs.

• VIX is only at “heightened,” not “panic,” levels.

• Airlines slumped but didn’t puke.

Translation: the market is still pricing a scare, not a catastrophe. We'll see if that changes when futures open tonight. 

Monday Playbook

If we open…	I’ll look to…	Why
S&P off < -1.5 % & VIX ≤ 22	Reload a modest vol hedge via week-out VIX call-spread	Protection still cheap
Oil > $80 & VIX > 25	Fade panic: sell call spreads on vol; add to long-dated risk ideas including Portfolio Armor Top Ten	Panic pricing usually over-shoots
Cease-fire rumor rally	Hedge, Take profits if current positions spike	Rumor-driven pops can retrace in hours

Focus On Price