Stagflation Fear Drives Widening Volatility Risk Premium

2026-03-09 12:54:00 ET

By Mandy Xu

Cross-Asset Volatility: Implied volatilities spiked across asset classes last week as the Iran conflict escalated, with oil prices jumping over 35%. Oil volatility surged higher, with 1M implied vol up almost 40 pts wk/wk to a high of 104% - highest since 2020 (when oil prices went negative) and trading near the peak volatility we saw during the 2008 GFC. What’s even more notable is the widening volatility risk premium, with WTI 1M implied vol trading at almost double the level of realized volatility (at 54%), suggesting fears of further escalation in this crisis. Oil volatility risk premium (1M) is currently at its highest level on record, going back 20 years. Oil skew has continued to invert further on demand for upside calls, with the cost of calls now reaching a record high relative to puts. Equity volatility jumped higher last week, with the weaker-than-expected US jobs number adding fuel to “stagflation” worries. The VIX® index gained almost 10 pts to 29%, far outpacing the increase in SPX® 1M realized volatility, which increased marginally by 0.5 pt to 13.8%. Rates vol gained as well, with inflation risk adding to the uncertainty over the rates outlook. Fed expectations have dialed back meaningfully, with traders now pricing just ~1.5 cuts for the year (vs. 2.5 a week ago)....

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