Strait Of Hormuz Closure
Iran’s new supreme leader, Mojtaba Khamenei, said the Strait of Hormuz should remain closed. He also said US military bases in the region should be shut or face attack. The IEA announced on Wednesday it will release 400 million barrels from strategic reserves. The release is intended to add short-term supply and limit sharp rises in oil prices. With the Strait of Hormuz effectively closed, a chokepoint for nearly 21 million barrels of oil per day is now blocked. We see a fundamental conflict between a severe physical supply disruption and a large, but temporary, strategic release from the IEA. This situation creates extreme uncertainty and, therefore, high implied volatility in the options market. The geopolitical risk premium is now exceptionally high, and we believe any price dips will be seen as buying opportunities. The 400 million barrel IEA release is historic, but it cannot replace the indefinite loss of a major global shipping lane. Traders should consider buying call options or bull call spreads to profit from further price increases driven by fears of a prolonged conflict.Options Strategies Amid Volatility
When we look back to the large strategic reserve releases of 2022, they put a temporary cap on prices but did not solve the underlying structural supply issues from the war in Ukraine. That release, while significant at the time, was much smaller than the 400 million barrels currently pledged. This time, the sheer size of the announced supply might lead to a sharp, albeit brief, price drop if any good news emerges. This unprecedented release creates a ceiling on crude prices, making it risky to be outright long on futures contracts at these levels near $96. Traders who anticipate that the IEA’s action will overwhelm the market’s panic could look at put options. These instruments would provide a way to profit if the supply injection successfully pushes prices back down toward the low $90s. Given the two powerful and opposing forces at play, the most predictable outcome is continued, wild price swings. This suggests that derivative strategies that profit from high volatility, such as long straddles or strangles, should be considered. These positions will be profitable if the oil price makes a significant move in either direction, which seems highly likely in the coming weeks. Create your live VT Markets account and start trading now.
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