Options Brief – Hormuz hopes douse oil – 26 May 2026

US-Iran ceasefire talks send oil lower and European equities to two-month highs as US markets reopen after Memorial Day.

Progress in US-Iran ceasefire talks over the weekend, centred on a potential agreement to reopen the Strait of Hormuz, sent WTI crude oil futures down roughly 5% on Monday and lifted European equities to their highest level since early March. US markets were closed for Memorial Day; futures are pointing higher as Tuesday’s session opens.

Market snapshot

• S&P 500: 7,473.47 (Friday 23 May close, +0.37%); futures up 0.65% at time of writing.
• Nasdaq 100: 29,481.64 (Friday close, +0.42%); futures up 0.85%.
• STOXX 600: 631.64 (Monday close, +1.04%), highest level since early March; DAX +2.01%, Euro Stoxx 50 +1.95%; FTSE 100 down 0.64% as UK energy exposure weighed.
• WTI crude oil: approx. 91.76 at time of writing, down roughly 5% on Monday as the Hormuz supply-relief trade drove airlines and banks sharply higher across Europe.
• Market regime: Low vol bull – VIX 16.59, 20-day realised vol 10.4% (decreasing), S&P 500 +6.95% above its 50-day moving average.

Options angle

The CBOE Volatility Index (VIX) sits at 16.59, comfortably below the 18 threshold that separates low-vol from elevated regimes. Front-month VIX futures at 18.95 and second-month at 20.71 suggest the market views the current calm as temporary, though that contango is not unusual for this vol regime. More telling are two other readings: the CBOE SKEW index, which measures the premium investors pay for out-of-the-money downside protection relative to equivalent upside exposure, sits at 137.39, and the CBOE total put/call ratio (PCC) surged 44% on Monday to 1.209, one of the larger single-session hedging spikes seen alongside a simultaneously rising equity market. Realised vol over the past 20 days is running at 10.4% – well below where implied vol is pricing. Spot vol is low. Institutional desks are not acting like it will stay that way.

Strategy insight – Bullish risk reversal, using SKEW to tilt the cost structure. The CBOE SKEW index at 137.39 means out-of-the-money puts are priced with a significant premium over equivalent out-of-the-money calls – an asymmetry that can be put to work directionally. A bullish risk reversal sells an out-of-the-money put, collecting elevated premium due to SKEW, and uses the proceeds to buy an out-of-the-money call, typically at low or zero net cost. With futures pointing higher and the Hormuz trade constructive at the open, the structure gives participation in continued upside without paying a large net debit. The main risk is the short put: if sentiment reverses sharply – a breakdown in negotiations, an oil spike – losses on the downside leg can be substantial and are not capped.

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it’s crucial to make informed decisions.

Strategy insight – Long straddle on energy, playing the binary Hormuz outcome. WTI crude oil is down roughly 5% on Hormuz optimism, but the deal is not closed – officials on both sides continue to send mixed signals, and a breakdown would send oil sharply in the opposite direction. When the direction of a large move is genuinely uncertain but a large move itself is plausible, a long straddle – buying both an at-the-money call and an at-the-money put on an energy instrument – captures the payoff regardless of which way it resolves. The Energy Select Sector SPDR ETF (XLE), which tracks the major US energy companies, is a liquid and accessible vehicle for this structure. If implied vol in energy options has not yet fully repriced to reflect the binary outcome, the straddle may still be acquirable at a reasonable cost relative to the expected move. The position loses if oil and energy stocks stay near current levels through expiry, in which case time decay erodes the full premium paid.

Conclusion

The Hormuz trade is running the session: oil lower, European stocks at two-month highs, and US futures pointing up into the reopening. Beneath the surface, elevated SKEW and Monday’s put/call surge both point in the same direction – institutional money is hedging, even as it rides the rally. For an options trader, Tuesday’s setup supports two complementary positions: a risk reversal to participate in the upside at low cost, and an energy straddle to hold exposure to the Hormuz binary, with any signal from Tehran as the key watch point.