In water reactors, iodine stress corrosion cracking is considered the cause of pellet-cladding interaction failures, but the mechanism and chemistry are debated and the protective effect of oxygen is not understood. Density functional theory calculations were used to investigate the interaction of iodine and oxygen with bulk and surface Zr under applied hydrostatic strain (2% to +3%) to simulate crack tip conditions in Zr to ZrO, using a variety of intermediate suboxides (ZrO, ZrO, ZrO and ZrO). The formation energy of an iodine octahedral interstitial in Zr was found to decrease with increasing hydrostatic strain, whilst the energy of an iodine substitutional defect was found to be relatively insensitive to strain. As the oxygen content increased, the formation energy of an iodine interstitial increased from 1.03 eV to 8.61 eV supporting the idea that oxygen has a protective effect. At the same time, a +3% tensile hydrostatic strain caused the iodine interstitial formation energy to decrease more in structures with higher oxygen content: 4.56 eV decrease in ZrO compared to 1.47 eV decrease for pure Zr. Comparison of the substitutional and interstitial energies of iodine, to the adsorption energy of iodine, in the presence of oxygen, shows the substitutional energy of iodine onto a Zr site is more favourable for all strains and even interstitial iodine is favourable between strains of +1-5%. Although substitutional defects are preferred to octahedral interstitial defects, in the ordered suboxides, a 3% tensile strain significantly narrows the energy gap and higher strains could cause interstitial defects to form.