economy
This options trade is a bet on oil prices falling once traffic picks up in the Strait of Hormuz
Jeff Kilburg walks through how to use options to bet on crude oil prices falling this month.
TL;DR
- Crude oil prices are elevated due to the Iranian conflict, keeping oil near $100 a barrel.
- Reopening the Strait of Hormuz could cause the geopolitical risk premium to disappear, leading to a rapid drop in oil prices.
- Oil traders are more pessimistic about an Iranian resolution than equity traders, contrasting with the S&P 500's recovery.
- If tanker traffic resumes, West Texas Intermediate oil futures could fall to the $70s or $80s.
- A specific options trade (buying an April 22 $120 USO put and selling an April 22 $110 USO put) was executed to profit from falling oil prices, costing $325 per spread.
- The expiration of this put spread is timed after a two-week ceasefire deadline with Iran.