Donald Trump said the US would hold off on launching new strikes on Iran, citing the prospect of “rapidly” reaching a deal on Tehran’s nuclear programme and the full reopening of the Strait of Hormuz. He said negotiations with Iran, likely via intermediaries, would begin on Monday, and described having called off what he said would have been a “massive attack” on Friday. Trump also said discussions involving Saudi Arabia, the UAE, Qatar and Iran informed his decision, and that agreements were expected on managing the Strait and on denuclearisation in Iran.
Iranian Foreign Minister Abbas Araghchi said on Sunday via Telegram that talks between Iran and Oman were in the final stages. He said the two states that flank the Strait of Hormuz were discussing a new route through it, while the negotiations did not address whether the waterway would be closed or open. Separately, Iran’s semi-official Mehr news agency denied that Tehran had asked Washington to pause further military action. Axios reported on Sunday that Saudi Crown Prince Mohammed bin Salman urged Trump to refrain from additional strikes, and the Saudi state news agency said he pressed for dialogue to de-escalate tensions.
Market Volatility and Derivative Trading Strategies
We are looking at a highly volatile environment for energy derivatives as geopolitical tensions in the Middle East hang in a delicate balance. With negotiations between the US, Iran, and regional intermediaries set to begin this Monday, derivative traders must brace for sharp, sudden price swings in crude oil futures. We believe the market will initially price in a temporary sigh of relief, but the underlying skepticism from Tehran means we cannot rule out sudden risk-off spikes.
The Strait of Hormuz remains the ultimate chess piece, carrying roughly 20 million barrels of oil per day, which accounts for about 20% of global liquid petroleum consumption. Historically, even minor threats of closure have sent the Cboe Crude Oil Volatility Index (OVX) surging by over 30% in a matter of days. Because Oman and Iran are discussing transit routes without addressing a potential closure, we expect options implied volatility to remain highly elevated.
Protective Hedges and Position Management
We recommend that derivative traders avoid heavy directional bets and instead focus on volatility-based strategies like long straddles or strangles to capture outsized moves. For those looking to hedge existing portfolios, buying out-of-the-money Brent call options is a prudent way to protect against a sudden breakdown in talks. As we saw during previous Middle East escalations when Brent jumped nearly 10% in a single week, the cost of option protection is cheap compared to the risk of being caught short.
Currently, the Brent crude options skew shows a strong bias toward calls, indicating that the market is still deeply concerned about supply disruptions despite the paused strikes. We should closely monitor the premium on short-term puts, as any concrete progress in the negotiations could rapidly crush this geopolitical premium. Staying nimble with tight stop-losses on futures contracts is crucial as we navigate these headlines over the coming weeks.
