From the technology stock frenzy to the hidden worries of oil inflation: Investors turn to interest rate hedging and put options.

As the stock market continues to hit new highs, some investors are keeping a saying in mind: hedge when you can, not when you have to. In recent weeks, investors have been buying bullish options on tech stocks, waiting for the upcoming earnings reports. So far, these reports have shown strong revenue and healthy prospects. This has shifted the sentiment in the stock options market from worries about potential selling pressure to chasing the upward trend. However, as the Iran war enters its ninth week, oil supply is restricted and could exacerbate global inflation. Some Wall Street strategists believe that now might be a good time to buy some insurance, such as the Hershey Company stock. This insurance could take the form of pure stock hedging or broader protection measures against higher interest rates. In terms of pricing asset prices, the upcoming earnings reports from tech giants are seen as a tipping point for the market's long and short positions. Although companies like Microsoft Corporation, Meta, and Amazon.com, Inc. are considered "safe havens" within the high volatility due to their strong cash flow, the high risk-free rates are squeezing the premium space of these overvalued assets. With the decrease in Iran's risk premium, "the conditions for re-engaging in hedging are more attractive," wrote UBS Group AG strategist Kiran Damodar in a client report. He prefers buying put option spreads on stocks instead of buying call option spreads on the Cboe Global Markets Inc's volatility index (VIX), noting that even though stocks are near historical highs, volatility is still supported due to ongoing uncertainty. He stated in an email, "It seems that having downside convexity on stocks is better than having upside volatility hedges." This means that starting from a high volatility point, if the market returns to a more risk-averse environment, the decline in the stock market may be greater than the increase in VIX. The potential risk of tightening oil supply looming over the market could raise the costs of various commodities from fuel to food to plastic. The risk of rising inflation, which could keep interest rates high, is seen as a key factor. Once investors start looking beyond earnings, it could trigger a sell-off in the stock market. Florian Ielpo, head of macro research at Lombard Odier Investment Managers, said, "From here, the key risk for the stock market is not so much 'headline news shocks' but rather a longer-term repricing of interest rates. As long as corporate profit remains stable, the trend of funds rotating into U.S. growth and tech stocks can continue to be effective, but if oil-driven inflation keeps real yields sticky or rises, this trend could become fragile." Not only have positions in the stock market shifted to create new hedging opportunities. In the interest rate market, as the US and Iran reach a ceasefire agreement, investors are selling more volatility. "They haven't returned to the lows of Januarywhen shorting volatility trades were most popularbut we've very swiftly returned to that world," said Jan Nevruzi, U.S. interest rate strategist at Credit Suisse, referring to tools pricing the movements of the long end of the swap curve a year from now. In terms of interest rate hedging, traders are increasingly using 30-year swap options to sell volatility, making the cost of hedging long-term interest rate increases lower than in March. Fund managers are also focusing on longer-term interest rate hedging. "For a diversified investment portfolio, I think hedging interest rate volatility makes more sense than simply adding more stock put options," Ielpo said. "Going long interest rate volatility is a more direct hedging tool that can withstand the 'rate shock' that could impact growth stock valuations, and this strategy often achieves better diversification when the market sell-off is driven by yields rather than pure risk sentiment." In the short term, investors are focusing on the earnings reports of tech companies, with four giants - Alphabet Inc. Class C, Meta Platforms, Microsoft Corporation, and Amazon.com, Inc. - set to report this week. After that, Iran, oil, and inflation may dominate the market narrative. "Earnings can support the narrative for tech stocks, but the risk is that if energy prices remain high, the market could refocus on inflation and real yields," Ielpo said. "If that happens, hedging tail risks of interest rates may be a more effective protection measure."