US Vice President JD Vance told CNBC on Monday that Washington expects the Strait of Hormuz to remain “open toll-free in the long term”, according to Reuters. He said a two-step verification process is planned, while adding that many details remain unresolved and that talks will test where Tehran is prepared to make concessions.
Vance also said the US expects a full spectrum of Iranian representatives to attend a signing on Friday and that the text could be released this week. He added that Israel would have a seat at the table in what he described as a new Middle East. After the remarks, the US Dollar Index stayed in the lower half of its daily range and was down 0.3% at 99.50 at the time of writing.
Oil Volatility Signals And Market Strategy
We see the comments about the Strait of Hormuz as a major signal for oil volatility. Historically, tensions in this chokepoint, like the 2019 tanker incidents which saw Brent crude jump nearly 20% in a day, cause massive price swings. We are therefore looking at buying volatility on crude oil futures, perhaps through straddles, to profit from a large move once the deal’s fate is known this Friday.
We believe the broader market is under-pricing the relief a successful deal would bring. The CBOE Volatility Index (VIX) is currently trading around 18, which we feel does not fully capture the potential drop if this geopolitical risk is removed. We are positioning for this by selling VIX call spreads, anticipating a move back toward the year’s lows near 13.
Currency, Sector Winners And Hedging Approaches
The US dollar’s initial weakness on the news might be a head-fake for certain currency pairs. We are focused on USD/CAD, which historically shows a strong negative correlation with oil prices, often exceeding -0.7. If a deal is signed and crude prices fall, we anticipate the Canadian dollar will weaken, making long USD/CAD call options an attractive trade.
We are also preparing for the clear winners and losers if this deal goes through. With jet fuel accounting for up to 30% of airline operating costs, a sustained drop in oil prices would be a massive tailwind, so we are buying call options on transportation ETFs. Conversely, we are hedging our energy exposure by buying put options on major oil exploration and production indices.
