Strait Of Hormuz Shipping Status
Iran’s representative to the UN maritime agency said the Strait of Hormuz remains open to all shipping, except vessels linked to Iran’s enemies. G7 foreign ministers said on Saturday they want an “immediate and unconditional cessation of all attacks by Iran”. They also said the G7 is ready to take steps to support global energy supply. Iran fired long-range missiles for the first time in the conflict and hit Dimona in southern Israel, near military bases and the Negev Nuclear Research Center. The IAEA said it had no indication of damage to the nuclear facility, and the BBC reported more than 160 people were injured, some seriously. The immediate focus is on crude oil, as the Strait of Hormuz is the chokepoint for roughly 20% of the world’s daily petroleum supply. We should anticipate extreme volatility, making long call options on Brent and WTI futures the primary strategy to capture upside from a potential supply shock. The cost of these options, or implied volatility, will be extremely high, reflecting the market’s fear.Volatility And Hedging Approaches
We have seen this pattern before, and the potential price movement is significant. Looking back at the 1990 Gulf War, oil prices more than doubled in just a few months, and even the 2019 drone attacks on Saudi facilities caused a nearly 20% price jump in a single day. The current rhetoric from both the US and Iran suggests a far more severe disruption is on the table, which could eclipse these historical precedents. Beyond energy, we must look at the CBOE Volatility Index, or VIX, which is the market’s fear gauge. Expect the VIX to trade at levels not seen since the 2020 pandemic crash, likely pushing above 50 or 60. Trading VIX futures or buying call options on the index is a direct bet on continued market-wide panic and uncertainty. With such fear, we should be actively hedging our equity portfolios using index put options. Buying puts on the S&P 500 or Nasdaq 100 provides downside protection against a broader market sell-off, which is likely if energy prices trigger inflation and recession fears. These positions serve as insurance for a portfolio braced for conflict. Specific sectors will experience divergent outcomes, creating opportunities for pairs trades. We should consider buying call options on defense contractors and shipping companies that operate outside the Persian Gulf. Conversely, buying put options on airlines and cruise lines, which are directly hurt by high fuel costs and geopolitical instability, is a logical hedge. The elevated implied volatility presents a high-risk opportunity for premium sellers. Selling far out-of-the-money puts and calls on oil and equity indexes will yield significant income due to the market’s fear. However, we must be aware that a sudden escalation could lead to catastrophic losses, as this strategy depends on the conflict not worsening beyond current expectations. Create your live VT Markets account and start trading now.
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