Hedge funds and institutional investors are increasingly deploying complex derivatives strategies to navigate extreme cross-asset volatility triggered by the conflict involving Iran, according to a report by Bloomberg citing several market participants including Citigroup.
Large swings in energy markets have rippled across global assets, prompting investors to explore hybrid options that link price moves in multiple markets. Oil has been at the centre of the turbulence, with Brent crude experiencing a record intraday range of almost $36 per barrel on 9 March. The move sparked sharp reversals across equities, bonds, gold and currencies, while implied volatility gauges surged.
The breakdown in traditional correlations has made conventional hedging strategies less reliable. In particular, typical safe-haven assets such as gold or government bonds have struggled to provide protection as concerns about stagflation intensify. Market participants say a prolonged disruption to shipments through the Strait of Hormuz could push up prices for commodities ranging from natural gas to fertilisers, feeding broader inflation pressures.
Against that backdrop, investors are increasingly trading over-the-counter hybrid options that combine exposure across different asset classes. Activity has been especially strong in structures such as dual binary and contingent options, which allow traders to express views on the joint performance of markets such as equities, commodities and interest rates.
According to Antoine Porcheret of Citigroup, demand for hybrid options has risen sharply amid heightened geopolitical risk. He said investors across the market are increasingly deploying “dual digital” hedges to manage volatility.
Dual binary options offer an all-or-nothing payoff if predefined conditions across two assets are met. While sometimes criticised for resembling event-style bets, the structures are often used by institutional investors seeking targeted returns within strict risk constraints.
Derivative strategists say several cross-asset trades are gaining traction. Analysts at Barclays Plc have highlighted put spreads on the Euro Stoxx 50 or the S&P 500 Index tied to rising interest rates. Other suggested trades include a combination of falling equities and rising oil prices through exposure to the United States Oil Fund.
Meanwhile, strategists at UBS Group AG have pointed to hybrid structures linking equity declines with higher interest rates, as well as traditional stagflation trades pairing weaker equities with gains in gold.
There are also signs of increased hedging activity in listed markets. Traders have reported rising volumes in tight crude oil call spreads, which market makers may be using to offset exposure from over-the-counter binary trades.
