Exposure And Export Flexibility
Differences are linked to exposure to export disruption, the ability to bypass the Strait of Hormuz, and the structure of non-oil sectors. Economies with more export flexibility and alternative routes are expected to absorb disruption more easily. GCC public finances start from a relatively strong position, supported by large sovereign balance sheets in many countries. Sovereign wealth assets and foreign exchange reserves exceed USD 6.5tn, providing a buffer against domestic and external shocks. Saudi Arabia, the UAE and Oman are identified as having greater export flexibility and bypass options. Countries that rely more on the strait and have constrained trade routes are expected to face a larger impact. With Middle East tensions now entering their fourth week, we are seeing significant price action directly linked to risks around the Strait of Hormuz. Brent crude has surged over 25% in the last month, touching $112 per barrel as markets price in potential supply disruptions. This level of uncertainty suggests traders should consider long volatility strategies through options on major oil benchmarks.Volatility And Relative Value Trades
Implied volatility in the crude markets has reached its highest point since the energy market dislocations of early 2024, indicating that options are pricing in larger-than-usual price swings. Rather than simply betting on direction, purchasing straddles or strangles could prove effective, profiting from a large price move whether it goes up or down. These strategies are a direct play on the ongoing geopolitical instability. We also see a clear divergence opening up between Gulf economies, which creates opportunities for pairs trading. Saudi Arabia’s ability to bypass the strait via its East-West pipeline makes its market more resilient compared to others more reliant on the waterway. This is reflected in recent performance, with the Saudi Tadawul index down only 4% this month while Dubai’s market has fallen over 9%. A potential trade based on this is to go long Saudi equity index futures while simultaneously shorting futures on a more exposed market. This strategy isolates the specific Hormuz risk, hedging against a general market downturn while profiting from the relative outperformance of the more resilient economy. The massive sovereign wealth buffers exceeding $6.5 trillion should, however, prevent a systemic collapse, putting a theoretical floor on market downside. This situation contrasts sharply with the relative calm we saw through most of 2025, where oil traded in a predictable range. The current environment demands a focus on assets with clear exposure to the conflict’s divergent outcomes. We believe using defined-risk option spreads is prudent, as it allows for capitalizing on the heightened volatility while capping potential losses if tensions were to suddenly de-escalate. Create your live VT Markets account and start trading now.
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