US President Donald Trump said he would not be rushed into an agreement, arguing that Iran cannot outlast him because he does not “care about the midterms”, CNN reported on Wednesday. He also said the Strait of Hormuz would be “open to everybody” and that the US would “watch over it”, adding that these terms form part of negotiations with Iran.
Separately on Wednesday, US Secretary of State Marco Rubio said Washington will give talks with Iran “every chance to succeed”, and said discussions have made some progress. Trump said he prefers diplomacy while keeping other options available if it fails. Late Wednesday, Fars News reported that three explosions were heard east of Bandar Abbas, and that air defences were activated for several minutes.
Market Opportunities in an Uncertain Geopolitical Environment
We are seeing conflicting messages from the administration, with a stated preference for diplomacy set against rising tensions and reports of explosions near the Strait of Hormuz. This environment of high uncertainty is exactly where derivative strategies can be used to manage risk and capitalize on potential price swings. The market is not yet fully pricing in a worst-case scenario, which presents an opportunity.
The most direct impact will be on crude oil, as about 20% of the world’s total oil consumption passes through the Strait of Hormuz daily. We believe buying near-term call options on Brent crude futures is the most effective way to position for a potential supply disruption. This provides significant upside exposure if tensions escalate, while capping the downside risk to the premium paid.
Risk Management Strategies for Energy and Equities
We only need to look back to the start of the conflict in Ukraine in February 2022, when Brent crude surged from $95 to over $120 per barrel in less than two weeks. The current reports of air defense activations near Bandar Abbas suggest a similar hair-trigger situation where prices could move dramatically on a single headline. Establishing these positions now, while implied volatility has risen but not exploded, is key.
Beyond energy, we should expect broad market turbulence if the situation deteriorates, as a spike in oil prices would fuel inflation fears and dampen economic growth. We are therefore buying put options on the S&P 500 to hedge our long equity portfolios against a risk-off event. With the CBOE Volatility Index (VIX) still trading below 15, purchasing this type of portfolio insurance remains relatively inexpensive.
