US President Donald Trump said negotiations towards a deal with Iran to end their conflict and reopen the Strait of Hormuz were “proceeding nicely”, Bloomberg reported on Monday. He also said he had urged Saudi Arabia, Qatar and other countries to join the Abraham Accords, signalling momentum towards a US-Iran agreement.
Key terms still require resolution between the US and Israel, including whether ships transiting the Hormuz Strait would have free passage and the timetable for unfreezing billions of dollars of Iranian funds. In markets, crude prices fell after the report, with West Texas Intermediate down 6.75% on the day at $89.55.
Oil Market Volatility and Trading Strategies
We are treating this headline with urgency, as the 6.75% drop in WTI crude shows the market is pricing in a higher probability of a deal. This sudden increase in uncertainty means we should expect implied volatility in oil options to surge in the coming days. Therefore, buying options will be expensive, but holding them could be very profitable if a directional move occurs.
Given the potential for a significant increase in global supply, we are looking at purchasing put options on WTI and Brent crude futures for the July and August contracts. A deal could release an estimated 1.3 million barrels per day from Iran, according to pre-sanction export data, which would push prices down well into the low $80s. Last week’s EIA report on May 20, 2026, which showed a surprise draw in inventories, now seems like a distant memory in the face of this geopolitical shift.
To manage the high cost of options, we are primarily considering bear put spreads, which will lower our entry cost while still offering significant upside. The biggest risk is a sudden collapse in negotiations, which would cause oil prices to spike and render these positions unprofitable. We must therefore remain nimble and ready to exit our positions on any news of a breakdown in talks.
This situation has echoes of the lead-up to the 2015 JCPOA agreement, which contributed to a prolonged period of lower oil prices as the market anticipated the return of Iranian barrels. We believe that with global demand growth already softening in Q1 2026, the market is even more sensitive to new supply than it was then. This makes the potential downside for crude more pronounced.
Broader Market Implications and Additional Trades
Beyond crude itself, we see opportunities in shorting the energy sector through derivatives. We are buying puts on the Energy Select Sector SPDR Fund (XLE), as oil producers’ equities are directly exposed to falling commodity prices. The market has not fully priced this risk into energy stocks yet, creating a good entry point for us.
Finally, a successful deal would lower the geopolitical risk premium that has been supporting the VIX. We are looking to sell VIX futures contracts expiring in late June, anticipating a calmer market environment if tensions in the Strait of Hormuz ease. This also makes us cautiously bullish on broader equity indices, which would benefit from lower energy input costs.
