Iran’s foreign minister has communicated with the EU’s foreign policy head, asserting that France, Germany, and the United Kingdom lack legal grounds to reinstate sanctions on Iran. He emphasised Iran’s willingness to resume nuclear discussions, contingent on the other parties’ demonstration of earnestness and goodwill.
Iranian Claims About UN Sanctions
He also claimed that attempts by the E3 to revive expired UN Security Council resolutions under Resolution 2231 are both invalid and ineffective.
Meanwhile, oil traders are paying close attention to developments in Iran, as tensions in the Middle East may cause oil prices to climb.
This letter from Iran’s foreign minister introduces a significant level of uncertainty into energy markets. For derivative traders, uncertainty is a direct driver of volatility, which means we should expect the cost of options to rise in the coming days. The key question is whether this is just diplomatic posturing or a real precursor to the removal of Iranian oil from the market.
For those of us who believe this standoff will worsen, buying call options on crude oil futures is a direct way to position for higher prices. We could look at October or November WTI contracts with strike prices around $95 or $100 a barrel, which are currently trading around $88. This strategy allows for significant upside if sanctions are reimposed, which would immediately threaten the roughly 1.8 million barrels per day that Iran is currently exporting.
Traders’ Strategies For Volatility
Conversely, a belief that diplomacy will succeed suggests oil prices have a geopolitical risk premium that will soon disappear. Traders with this view should consider buying put options on energy ETFs, which would profit from a price decline back toward the low $80s. A peaceful resolution would not only secure current Iranian supply but would also ease broader tensions in the Strait of Hormuz.
Given the binary nature of the potential outcomes, trading the volatility itself is a prudent approach. We can use strategies like a long straddle, which involves buying both a call and a put option at the same strike price. This position profits if the price of oil makes a sharp move in either direction, whether it’s a spike from sanctions or a drop from a new agreement.
We must remember the market’s sensitivity to Middle East supply disruptions, as we saw back in September 2019 with the attacks on Saudi Arabia’s Abqaiq facility. That event caused crude prices to surge nearly 20% in a single trading session, the most since the 1990s. This history shows how quickly prices can react, making options a valuable tool for defining risk in advance of a potential shock.
Currently, the CBOE Crude Oil Volatility Index (OVX) has already climbed from the low 30s to near 40 in the past month, signaling rising anxiety among traders. This shows that the market is already on edge and bracing for a significant move. Any definitive news out of the EU or Iran will likely serve as the catalyst that resolves this built-up pressure.
