Iran’s Fars News Agency reported on Wednesday that oil tankers travelling through the Strait of Hormuz have been stopped after Israel breached the ceasefire, according to Reuters.
Iran’s Tasnim News Agency, citing an unnamed source, said Iran will withdraw from the ceasefire agreement if attacks on Lebanon continue. It reported that ending the war on all fronts, including Lebanon, was part of a two-week ceasefire agreement with the US.
Market Snapshot
The US Dollar (USD) Index recovered slightly from a four-week low near 98.50. At the time of press, the index was down 0.72% on the day at 98.80.
Given the developing situation in the Strait of Hormuz, we should anticipate a sharp increase in oil price volatility. Call options on Brent and WTI crude futures for the coming weeks are now a primary focus, as any extended closure could trigger a supply shock. With roughly 20% of global oil consumption passing through the strait daily, the potential for a rapid price spike is significant, similar to the tensions we saw in the region back in 2019.
This geopolitical flare-up is a clear signal to hedge against broader market downturns. We should consider buying put options on major indices like the S&P 500, as heightened energy costs and conflict risk will almost certainly dampen investor sentiment. Historically, sudden oil shocks, such as the one in 1973, have preceded major equity bear markets.
We expect a flight to safety, making call options on gold and U.S. Treasury bond futures attractive positions. Gold often rallies during periods of Middle Eastern conflict, and we saw yields on government debt fall sharply during the onset of instability in early 2022 as capital sought safe havens. This pattern suggests that traders should prepare for falling yields and rising bond prices.
Volatility And Currency Positioning
The most direct way to trade this uncertainty is through volatility itself. We believe buying call options on the VIX index is a prudent move, as its value will likely surge if the conflict escalates and tanker traffic remains halted. Looking back at the lessons from the 2008 and 2020 crises, the VIX spiked over 80, showing how profitable positioning for volatility can be in uncertain times.
Finally, while the US Dollar initially weakened on the ceasefire news, this reversal of events should provide it with safe-haven support. However, the situation remains fluid, so using options strategies like straddles on major currency pairs like EUR/USD could be an effective way to profit from large price swings in either direction. The initial market reaction shows confusion, and trading the resulting volatility might be safer than picking a direction right now.
