West Texas Intermediate (WTI) opened Monday with a bearish gap of over 7%, trading around $82.50 a barrel in Asian hours. Prices fell after the US and Iran paused strikes over the weekend following two weeks of direct attacks, easing immediate fears of escalation. The pause fuelled expectations of a diplomatic track that could lower regional tensions and support the eventual resumption of commercial shipping through the Strait of Hormuz.
The US also halted its military campaign as concerns grew over dwindling interceptor supplies and fewer remaining high-value targets inside Iran. General Dan Caine, Chairman of the Joint Chiefs of Staff, warned President Trump on Friday that extending operations would strain munitions reserves. US Ambassador to the UN Mike Waltz said forces remain “locked and loaded” while Washington seeks room for talks, and Reuters cited a senior Iranian official describing Tehran’s stance as “attack for attack” if US strikes resume. Caution persists over supply risks after Iran-backed Houthis in Yemen claimed recent attacks on Saudi facilities along the Red Sea.
Volatility Deflation and Option Strategies
With WTI crude plunging over 7% to around $82.50, we are seeing a rapid deflation of the geopolitical risk premium. For derivative traders, this sudden pause in US-Iran hostilities means a sharp contraction in implied volatility (IV) is likely in the coming weeks. We recommend positioning for a “volatility crush” by favoring option-selling strategies to capitalize on premium decay.
This view is supported by historical trends, where oil volatility indices (OVX) regularly spike during Middle East tensions but quickly collapse when diplomacy starts. Furthermore, strong global supply, including US crude production near 13.4 million barrels per day, fundamentally limits how high prices can go without physical shortages. We believe this supply cushion makes buying expensive call options a losing bet right now.
Directional Trading and Risk Management
If you want to trade the price direction, we suggest using bear put spreads to target a slow drift toward the $78 support zone. Outright long options will likely lose value quickly because of the drop in implied volatility. We advise using spread strategies to reduce the impact of this volatility crush while still catching the downward momentum.
However, we must remain cautious as the threat of Houthi attacks on Saudi Arabian facilities keeps a baseline risk alive. If peace negotiations fail, we could see a sudden spike in call option demand. Keeping our positions small and flexible over the next two weeks will help us adapt if conflict breaks out again.
