Has the Iran Conflict Changed the Sell-Off Playbook?

Why did equity markets hold up relatively well in March? After last year's Liberation Day rout, investors were bracing for a repeat as the Iran conflict pushed oil above US$100 a barrel and inflation expectations moved higher. But the repeat never came.

One of the reasons commonly cited is the TACO (‘Trump Always Chickens Out’) trade, but we think another equally important factor is that investors entered this conflict more protected than at any point in recent history. If this shift persists, the sell-off playbook may be changing, with less late-stage panic and more hedging, making market declines more orderly and the bid for protection more persistent.

For the better part of 15 years, portfolio hedges were seen as a drag, a cost with little payoff in a world of ever-tighter spreads and ever-higher valuations. There simply was not enough excess return lying around to fund meaningful downside protection. That calculus has changed. Geopolitical volatility is no longer a tail risk that shows up once in a blue moon, but a structural feature that markets now seem to be planning for as part of the background music for the foreseeable future.

Investors were already cautious

Going into the conflict, portfolio hedging was at historically elevated levels. This was not because anyone had predicted the war (even if some prediction markets were leaning toward escalation). It was because investors had already turned cautious, unnerved by stretched valuations, concerns about private credit, AI impact on software valuations and runaway capital expenditure. Morgan Stanley said at a 7 April investor event that it estimates that the dollar value of put option positioning (essentially insurance against falling prices) almost touched US$80 billion in early 2026, some 60% higher than any previous high going back to 2019.

This positioning changed the character of the sell-off. In past dislocations (Liberation Day being the most recent example), investors were typically underhedged. The scramble to buy downside protection as markets fell created a vicious feedback loop: everyone chasing hedges simultaneously, driving up the cost of protection and heightening panic. See the mega spikes in realised volatility in April last year versus the more muted rise in March of this year in Figure 1.

This time, hedges were already in place. Many investors used risk-off days to cash in protection they had put on for entirely different reasons. Selling those hedges back at a profit created natural buying pressure, helping to cushion the decline.

Figure 1. Realised volatility has risen, but not by much, relatively

Source: Bloomberg, from 11 March 2024 to 9 April 2026.

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TACO as the new "Fed Put"

Where did the courage to buy the dip by cashing in hedges come from? This is where TACO comes into play. For years, markets operated under the assumption of a "Fed Put", the belief that if prices fell far enough, the Federal Reserve would step in. TACO works on the same logic but is broader and harder to pin down. It applies across fixed income (e.g. 4.5% on the 10-year is the heavy favourite for the TACO strike in rates), equities, commodities and foreign exchange. If the pain becomes great enough, the thinking goes, policy will change quickly to stave off further pressure.

This combination of the pre-existing hedges and the TACO conviction prompted an orderly sell-off where the big, realised moves came on relief rallies. The down days were comparatively muted.

What the options market told us

This dynamic showed up clearly in the options market, too. Implied volatility, the forward-looking forecast priced into options, moved up as the conflict intensified. But realised volatility, the actual day-to-day movement in markets, remained rather sanguine (Figure 2). That is a very different story from Liberation Day, when realised volatility spiked sharply in both directions. Think of it as the difference between the weather forecast and how much it actually rained.

Figure 2. Realised volatility has remained more sanguine versus implied volatility

Source: Bloomberg, from 9 March 2023 to 27 March 2026.

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What comes next?

In derivatives markets, investors are a little less hedged now than they were going into March, but the overall positioning looks broadly similar. We believe they will be quick to cash in protection in any near-term drawdown, for much the same reasons.

The bigger question is whether this holds over time. The combination of pre-existing hedges and the TACO theme has served to buffer the impact of the Iran war, thus far. If geopolitical events were to escalate and accelerate, we may very well get to a point where the risk-off sentiment overcomes this dual theme buffer. Then, we could shift back into late-stage chasing as we saw during Liberation Day. So far, the dam has held.

That said, if investors have genuinely shifted from treating geopolitical volatility as a tail risk to planning for it as a structural feature of markets, the implications extend well beyond the current conflict. Future sell-offs may not be painless, but they may look different from the ones we have grown used to. The cost of carrying long risk may need to be recalibrated to make room for portfolio insurance as a normal course of business.

All data Bloomberg, unless otherwise stated.

Author: Matt Rowe, Managing Director, Solutions at Man Group