The 90% Rule: What Derivatives Trading Teaches Us About Israel’s Strategic Logic

Here is a statistic that ought to unsettle anyone who thinks of options as bets on a binary outcome: according to the Chicago Board Options Exchange, only around ten per cent of options contracts are ever exercised. The rest are either closed out before expiration or expire worthless. The trader captures or cuts the position’s value without ever touching the underlying asset. No barrels of crude are delivered. No shares change hands. The option has done its work not by reaching its terminal payoff, but by enabling continuous strategic adjustment along the way.

But the deeper question is why. The answer is not preference. It is arithmetic.

The global over-the-counter derivatives market alone carries a notional value of approximately $846 trillion, according to the Bank for International Settlements. Add exchange-traded contracts and total notional approaches one quadrillion dollars — roughly eight times global GDP. The system cannot settle. There is not enough underlying economic reality to absorb the exercise of even a modest fraction of those contracts. Close-out is not a choice; it is a structural necessity imposed by the ratio of commitments to capacity. When your book dwarfs your underlying, you manage positions. You do not exercise them.

This fact has a powerful and largely unrecognised analogue in statecraft. States, like derivatives markets, carry strategic portfolios whose aggregate notional value vastly exceeds their capacity to exercise simultaneously. And no state illustrates this more vividly than Israel.

A small state with a very large book

Consider the scale of Israel’s open positions. Deterrence against Iran’s nuclear programme. Containment of Hezbollah. Suppression of Hamas. West Bank security. The Abraham Accords framework. The American alliance. The still-open normalisation option with Saudi Arabia. Freedom of navigation in the Red Sea. Cyber dominance. The Golan buffer.

The notional value of that strategic portfolio is enormous. The underlying economy — a nation of some 9.6 million people with GDP of over $500 billion — is not. The ratio of strategic commitments to national capacity mirrors, in structural terms, the derivatives market’s relationship to the real economy it references. Israel’s strategic book is leveraged in exactly the way a derivatives book is leveraged: the same underlying capacity supports multiple overlapping positions simultaneously.

This is why Israel closes out. Not because it lacks the will to exercise, but because the structure of its position demands it. Just as the derivatives market must offset the vast majority of its contracts because there is insufficient GDP to settle them, Israel must manage most of its strategic options through repositioning, deferral, and adjustment because there is insufficient national capacity to exercise them at once.

How the leverage works

In derivatives markets, leverage is achieved through collateral. A single dollar of margin supports multiple overlapping exposures. Israel’s strategic equivalent is the IDF reserve system, which allows a small standing force to support vast mobilisation capacity; the dual-use intelligence infrastructure that services multiple theatres simultaneously; and the American security guarantee, which functions as the ultimate collateral backstop — enabling Israel to hold positions it could not sustain on a fully funded basis.

Iron Dome is perhaps the clearest example of leveraged strategic collateral. Each battery supports dozens of open positions simultaneously, neutralising incoming threats across multiple fronts without requiring the irreversible capital commitment of escalation. The interceptor cost — estimates range from $40,000 to well over $100,000 per Tamir missile depending on production batch and urgency — is the premium paid to keep the book open. It is not the exercise price.

Targeted operations follow the same logic. From Stuxnet to precision strikes on weapons convoys transiting Syria, each was an adjustment to Israel’s strategic delta — a recalibration of exposure without drawing down the finite collateral that underpins the entire portfolio. Israel was not exercising; it was closing out individual contracts at favourable marks, rolling its exposure forward, and keeping the leveraged book intact.

The margin call

The structural risk in any leveraged book is the margin call: the moment when multiple positions move against you simultaneously and the collateral base can no longer support the open exposure. Counterparties demand settlement. Positions must be liquidated at unfavourable prices. The orderly process of close-out gives way to forced exercise.

October 7th was a margin call.

Multiple positions moved deep out of the money at once. The Gaza deterrence option, long assumed to be safely hedged, collapsed to zero. The northern border came under immediate stress. West Bank exposure widened. The intelligence collateral that had supported the entire book — the assumption of early warning — was revealed as insufficient.

The response was forced exercise in Gaza: the irreversible commitment of ground forces, the full drawdown of reserves, the expenditure of strategic capital carefully husbanded through decades of close-out management. And while that exercise consumed capacity, other positions — Iran, Hezbollah, the Red Sea — had to be frantically rolled or restructured with diminished collateral. This is precisely what happens when a leveraged book faces a margin call: you liquidate one position to meet margin on the others.

Assignment and the Abraham Accords

Not all strategic options resolve through exercise or expiry. Some are assigned — transferred to a new counterparty. The Abraham Accords represent precisely this. Normalisation with the UAE, Bahrain, Morocco, and Sudan reassigned strategic options across new holders. The Gulf states acquired a security hedge against Iran. Israel acquired an economic and diplomatic hedge that diversified its collateral base and reduced dependence on European goodwill.

In derivatives markets, assignment is routine. In geopolitics, it is called a paradigm shift. The mechanics are identical: risk is redistributed, collateral requirements are reduced, and the system’s capacity to absorb shocks is enhanced through diversification of counterparty exposure.

The ten per cent

Henri Le Chatelier observed that a system in equilibrium, when disturbed, adjusts to counteract the disturbance. This is what close-out achieves: continuous recalibration as the payoff surface shifts. But the principle has a limit. When the disturbance exceeds the system’s absorptive capacity — when notional exposure overwhelms collateral — adjustment gives way to rupture.

That is the ten per cent. And when it arrives, it reshapes the entire strategic surface for a generation. The Six-Day War repriced every option in the Middle Eastern portfolio overnight. The Yom Kippur War did the same. The twelve-day war with Iran in June 2025 did so again.

The derivatives analogy is not decorative. It captures something structural about how a small state manages vast commitments with finite resources: not through dramatic acts of will, but through the quiet, continuous work of closing out positions, rolling forward, adjusting delta, and preserving the collateral that keeps a leveraged book alive.

Israel has done this more consistently, and more successfully, than almost any state in modern history. The ninety per cent has kept it in the game for seventy-seven years.

But the margin call has come. And the question now is whether the collateral holds.