US-Iran Mixed Signals Leave Options Markets Uncertain

On Wednesday morning, Bitcoin had staged a small recovery to $69K alongside other risk-on assets, retracing part of the drawdown seen through March as geopolitical tensions in the Middle East showed tentative signs of easing. 

However, Thursday morning saw BTC fall 3% to give up those gains and return towards the $66K level as Trump promised to strike Iran ‘extremely hard’. 

Both the relief rally and subsequent crash occurred in tandem with other risk-on assets as crypto price action continues in large part to suffer from geopolitical uncertainty.

While short tenor options show a preference for puts, longer tenors show less bearish positioning than they did one week ago

In contrast to short tenor skews, green shoots of a recovery in sentiment are indicated in Block Scholes’ Risk Appetite Index, which has begun to recover from extreme bearish levels and now trends higher in both BTC and ETH. The -0.5 level has historically marked a transition away from panic-driven positioning and has acted as an indicator of the beginning of bullish momentum. 

While the move higher aligns with the recent recovery in spot, the signal is more notable than what is currently being expressed in options markets, where positioning remains bearish.

Block Scholes’ Risk Appetite Index measures the level of euphoria (above 1) or panic (below -1) in the spot market. Momentum in this index shows a strong relationship to spot returns.



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Mixed Signals and Elevated Volatility

Despite indicating that US military objectives may be nearing completion and suggesting a potential withdrawal from Iran within “two or three weeks”, President Trump delivered a strong reminder of his resolve for continued military strikes against Iran in a primetime speech delivered on Wednesday night. 

Such promises included strikes on key energy infrastructure, offsetting earlier hopes of de-escalation and leaving volatility elevated.

In contrast to the whipsaw in spot prices over the last three days, implied volatility levels had remained elevated throughout. 

Short-dated tenors continue to trade at elevated levels as options markets remain incredibly cautious and unwilling to price-in an immediate end to the war in the middle east (and, most importantly for markets, a reopening of the Strait of Hormuz).

While spot markets have reacted immediately to both positive and negative news for risk-on assets, crypto options markets have so far been a consistent barometer for how much faith markets place in discussions. We see that in the persistently elevated implied volatility levels for longer dated tenors over the last week, despite Trump’s delivery of a 15 point plan for peace and President Masoud Pezeshkian’s statement that Iran has the “necessary will” to end hostilities.



In contrast to the consistently elevated level of implied volatility, the directional sentiment expressed by options markets has repriced strongly several times in the last week in response to developments surrounding the Middle East conflict.

First, overtures from both sides earlier this week saw short tenor volatility smiles move from a 13 point premium in favour of puts to a far less bearish (but still far from bullish) 6.5 point premium.

Trump’s reiteration overnight of possible strikes on Iranian energy infrastructure and massing of troops in the Middle East has since returned those short tenor puts to a 10 point premium – not as bearish as positioning at the start of the week, but certainly not positioning for a rally. 

Options at tenors of 90 days or longer, however, have not been ...

Is that a small sign that markets are beginning to price for an end in sight?