US share indices rose on Tuesday after reports that the US has contacted Iran to arrange another round of talks before a ceasefire ends. WTI oil futures fell nearly 7% to below $93, while the Nasdaq Composite gained 1.5% and the S&P 500 rose 1.0%.
Oil tanker movements through the Strait of Hormuz were described as minimal after the US began blockading the route on Monday. Reports said a Chinese-owned, Malawi-flagged ship exited on Tuesday, but most traffic remained at a standstill.
The war has lasted 45 days, and markets reacted to the chance of fresh negotiations. Polymarket odds for the Strait of Hormuz reopening before the end of May reached 57% on Tuesday, after falling to 37% on Sunday.
Official statements indicated that negotiation positions were still far apart, including a US call for zero uranium enrichment. The US said it would intercept tankers carrying Iranian crude or paying an exit toll to Iran.
The S&P 500 traded at 6,955, less than 1% below its late-January peak, with Consumer Discretionary up 2.2% and Communications up 1.6%. Morgan Stanley said the conflict-driven correction pushed the S&P 500 forward P/E down as much as 18%.
Goldman Sachs and JPMorgan fell after earnings as net interest income contracted, despite earnings-per-share beats. Goldman Sachs estimated $43 billion of CTA buying this week, including $34 billion for the S&P 500, while RSI stood at 66 and support was cited at 6,800.
The market is giving us a clear signal based on the potential for geopolitical de-escalation, with stocks rising as oil prices fall. We should view this as a paired trade opportunity, where the outcome of the US-Iran negotiations will drive both asset classes in opposite directions. The core strategy in the coming weeks revolves around positioning for the reopening of the Strait of Hormuz.
Buying put options on WTI crude futures, or on oil-related ETFs like the USO, is a direct way to bet on a successful diplomatic outcome. We saw similar price pressure on crude in the early 2020s whenever progress was hinted at in the previous nuclear deal talks. Given that about 21 million barrels of oil pass through the Strait daily, representing roughly 21% of global petroleum liquids consumption according to 2024 EIA data, a reopening would immediately alleviate supply fears and push prices lower.
Concurrently, with the S&P 500 less than a percent from its all-time high set in January, we should consider call options to trade a potential breakout above the 7,002 level. The reported $43 billion in systematic buying from Commodity Trading Advisors (CTAs) this week provides a powerful tailwind for equities. Historically, these large, price-insensitive flows have been instrumental in pushing the market through key technical resistance points.
However, we must remember that the negotiation terms are reportedly far apart, and a positive outcome is not guaranteed. This makes buying some protection, like call options on the VIX index, a prudent hedge against a sudden breakdown in talks that would send stocks tumbling. Even after falling from its war-time highs of over 30 that we saw in early March, the VIX remains sensitive to headlines and could spike aggressively on any negative news.
Beyond the major indices, we are seeing pronounced strength in sectors that benefit from lower inflation fears and economic optimism. We should look at call options on semiconductor stocks like Micron (MU), which benefit from a well-documented memory shortage and continued strong demand from the AI industry. This offers a more focused way to play the rally by betting on established market leaders.
