The Wall Street Journal reported on Monday that White House advisers are weighing limited US strikes in Iran after peace talks stalled. The report cited officials and people familiar with the situation.
The WSJ said the options being discussed include limited strikes alongside a US blockade of the Strait of Hormuz. The aim described in the report is to break the deadlock in negotiations.
The report also said President Donald Trump could restart a full bombing campaign, but officials described this as less likely. They cited concerns about destabilising the region and the president’s stated dislike of long conflicts.
Another option in the report is a short-term blockade while the US pressures allies to take on a longer-term escort mission through the strait. The WSJ did not give a timetable for any decision.
With rising tension around the Strait of Hormuz, we see immediate risk in the energy markets. Roughly 25% of the world’s seaborne oil passes through this chokepoint, so any blockade or military action suggests buying call options on WTI and Brent crude futures. The increased probability of supply disruption is not yet fully priced into the current market.
This situation is reminiscent of past shocks that we have seen. Back in 2019, for instance, attacks on Saudi oil facilities caused Brent crude futures to jump nearly 20% in a single day. A blockade of the strait would have a far more significant and sustained impact on global supply, making derivatives that profit from a sharp price increase a primary consideration.
We are therefore positioning for a spike in market volatility, as measured by the VIX. During the geopolitical turmoil of early 2022, we saw the VIX surge above 30, and a similar move could be expected here. Traders should consider buying VIX call options or using put options on broad market indices like the S&P 500 to hedge their portfolios against a sell-off.
In times of uncertainty, capital flows toward safe-haven assets. Gold is currently holding firm near $2,450 an ounce, and a move toward new highs is likely if strikes commence. Bullish positions through gold futures or options on gold-backed ETFs would benefit from this flight to safety.
Sector-specific plays are also becoming clear. Defense contractors like Lockheed Martin and Raytheon typically see buying interest during periods of escalating military conflict. Conversely, industries highly sensitive to fuel costs and global stability, such as airlines and shipping companies, could face significant headwinds, making them candidates for bearish option strategies.
