US President Donald Trump and his national security team discussed Iran’s proposal to reopen the Strait of Hormuz and end the war, Reuters reported on Monday. The war has lasted two months.
White House press secretary Karoline Leavitt said it is unclear whether Trump will accept the offer, and said his bottom-line demands have not changed. She said the topic was discussed and that Trump would speak about it.
Oil Market Volatility Outlook
West Texas Intermediate (WTI) was up 1.35% on the day at $94.65 at the time of writing.
The current discussion between the US and Iran introduces significant uncertainty into the oil market. With WTI crude already at $94.65 after a two-month conflict, any news, positive or negative, will cause sharp price swings. This environment suggests we should prepare for heightened volatility in the weeks ahead.
We’ve seen the market price in a substantial war premium over the last eight weeks. If a credible peace agreement is reached to reopen the strait, oil prices could fall sharply as this risk premium evaporates. This is a classic “sell the news” scenario traders must be prepared for.
Trading Approaches For A Binary Outcome
Looking back, we saw a similar pattern during the initial phase of the Ukraine conflict in 2022. Prices surged on the initial shock but then retreated significantly over the following months, even as the conflict continued. This historical parallel warns against assuming that prices will only go up from here.
The Strait of Hormuz is not a minor chokepoint; it handles about 21 million barrels per day. This represents roughly 20% of global daily oil consumption, according to recent data from the U.S. Energy Information Administration. The sheer volume of oil at risk explains why the market is reacting so strongly to diplomatic whispers.
Given the binary nature of this situation—either peace or continued war—we should consider strategies that profit from large price movements. Buying options, such as straddles, on crude oil futures could be a prudent way to trade the expected spike in volatility without betting on a specific direction.
For those anticipating a peace deal, buying put options would offer a leveraged bet on a price collapse toward the low $80s. Conversely, if we believe the talks will fail, call options would be the tool to use for a potential move back towards $100 per barrel.
In the coming weeks, we need to watch more than just headlines from the White House. We should monitor satellite data on tanker movements in the Gulf and closely track shifts in the oil volatility index (OVX), which is currently elevated. These indicators will provide an early warning of market direction.
