Oil tumbles on US-Iran deal framework: How one trader is playing the move

Washington and Tehran appear to have a deal. Critically, the framework being discussed would release Iranian funds, allow the Strait of Hormuz to be reopened, enable Iran to sell oil freely, and begin nuclear negotiations.

The news is causing oil prices to fall to their lowest levels since April, which is good news for airline investors. The equation is simple: more oil through the Strait means more supply, and more supply will ease jet fuel prices. Considering jet fuel is one of the largest operating expenses for an airline, this is structurally bullish.

Airline stocks are rallying Monday and the U.S. Global Jets ETF (JETS) is on the verge of a new high for the year.

But structurally bullish and immediately actionable on the long side are two very different things. IATA forecasts a $98 billion jump in the sector’s collective fuel bill this year, which is expected to roughly halve global airline industry profits. That cost overhang doesn’t evaporate overnight just because diplomats shake hands. Jet fuel is a spot commodity, and even with the Strait reopening, the physical market will take time to normalize. Consider that the disruption has now lasted 3 ½ months.

Meanwhile, the JETS chart tells an interesting story. For one thing, Friday’s close represented a post-WAR high, suggesting investors were anticipating some resolution. It stands to reason, though, that the highs of early February may provide a resistance level representing the pre-conflict ceiling before the Hormuz crisis repriced the entire sector lower. That prior high is a ceiling with memory. Buyers who bought up there may now be sellers as we’re getting back to it.

Yes, DAL breaking to a new high is a genuine counterpoint. Delta has earned its outperformance; it’s the least fuel-exposed of the majors on a hedged basis and carries the strongest balance sheet. But one stock making a new high doesn’t clear the entire sector. JETS is concentrated, with DAL, AAL, UAL, and Southwest accounting for roughly 44% of the fund, and the rest of the roster is still working through elevated cost structures.

The Trade: 

Sell the JETS 1-month strangle, such as the July 27/33 (the $27 put / $33 call for approximately) for $1.25 in combined premium, depending on the fill.Max gain $125 on 1 contractMax loss: UnlimitedSkill level: Advanced

Note that I’ve selected these strikes assuming JETS will open well higher than Friday’s close. In any event the strangle would sell JETS at levels above where it was pre-war, and buy it at levels lower than it was trading just before the deal was announced.

The goal of the trade is to have ‘JETS’ shares stay above $27 and just below $33 by expiration, allowing you to pocket the full premium. The thesis is range-bound, not directional. The geopolitical catalyst is partially priced in; the fuel cost relief is real but lagged; and the technical picture offers a credible ceiling at the February high. Elevated implied volatility in the wake of the Iran-US diplomatic whiplash means we’re selling premium at an attractive implied move relative to what we think the realized move will be over the next 30 days.

It’s important to note that unless you make this trade against a long position, you will effectively be short the stock above that call’s strike price and will face unlimited risk. So this position requires constant attention. It’s also important to note that being short that put will tie up some margin and put you on the hook for buying ‘JETS’ shares for $27.