US stock indices opened about 1% lower on Monday as oil rose more than 9% from Friday’s close, with the Strait of Hormuz still closed. In the first half hour, the DJIA, Nasdaq Composite and S&P 500 fell between 1.3% and 1.6%. Saudi Arabia said it would cut production at two oil fields, while also tendering about 4 million barrels of crude through its Red Sea pipeline. Crude futures hit $119.48 overnight, the highest since June 2022, then fell below $100 a barrel after a Financial Times report on possible G7 reserve releases.

Volatility Driven Oil Options

Hims & Hers Health rose about 40% after reaching a legal deal with Novo Nordisk over GLP-1 weight loss drugs. Consumer discretionary fell 2.5%, while energy was up 0.2%. TS Lombard said higher oil prices could add two percentage points to global inflation, which may reduce the chance of interest rate cuts. The Strait of Hormuz carries about one-fifth of global oil supply; oil reference points include $130.50 (March 2022) and $147.27 (July 2008). Year to date, the Nasdaq Composite is now lagging the S&P 500 and Dow. With oil surging overnight, volatility is now the most important factor for us to trade. The wild swing from a high of $119 down below $100 shows that two-way risk is extremely high, making directional bets on futures risky. We should be looking at buying options straddles or strangles on crude oil, which profit from large price moves in either direction, as the Strait of Hormuz situation could escalate or be resolved unexpectedly.

Index Protection With Puts

The immediate drop in the S&P 500 and NASDAQ is a clear signal of fear, and we need to position for a potential deepening of this short-term downtrend. Buying put options on major index ETFs like the SPY or QQQ is a direct way to hedge our long portfolios or speculate on further weakness. Historically, geopolitical shocks cause the VIX, the market’s main fear index, to spike; for instance, it more than doubled in early 2020 and jumped over 75% in a few weeks during the 2022 invasion of Ukraine, showing how quickly fear can take over. We are seeing a classic sector rotation, with energy gaining while consumer discretionary stocks get hit the hardest. This presents a clear pairs trade opportunity using options on sector ETFs. We should consider buying calls on the Energy Select Sector SPDR Fund (XLE) to ride the tailwind of higher oil prices while simultaneously buying puts on the Consumer Discretionary SPDR Fund (XLY), as sustained high gas prices will almost certainly hurt consumer spending. The threat of rising global inflation will put central banks in a difficult position, making interest rate cuts highly unlikely in the near term. This means bond prices could fall as yields rise to reflect the new inflation risk. We can express this view by buying put options on long-duration Treasury bond ETFs, a strategy that would have been very profitable during the 2022-2023 period when the Federal Reserve was aggressively hiking rates to fight inflation. Even with the broad market selling off, the 40% spike in Hims & Hers Health stock shows that company-specific news remains a powerful driver. This reminds us that we should still look for unique opportunities in single-stock options that are not tied to the geopolitical conflict. The implied volatility on names with major catalysts can offer chances to profit that are completely separate from the movements in oil or the major indices. Create your live VT Markets account and start trading now.

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