Oil Plunges, Undercurrents Thrive? June 19 Deal Could Flip — Option Strategy to Capture Time Value

With rising expectations that the U.S.-Iran ceasefire agreement will be signed, the market appears to have temporarily escaped the shadow of inflation, and U.S. equities have finally welcomed a long-overdue rebound.

Many investors may feel this is the time to buy the dip. However, I want to caution: do not yet let your guard down. The market's volatile phase has not passed. The current gains in U.S. stocks remain unstable, and the first leg of the crude oil bearish rally may already be complete. We need to patiently wait for the November 19 ceasefire agreement signing results and specific details to materialize before the market can potentially launch a new bearish phase. More importantly, for both the fragile rebound in U.S. equities and U.S. Treasuries, adopting a selling-options strategy may currently be the more appropriate choice.

Let's dive into the details:

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Why Am I Still Unwilling to Fully Trust This Ceasefire Agreement That Looks Like "Painting a Cake"?

We need to understand that the trigger driving this U.S. equity rebound is the U.S. and Iran's nearing agreement signing, but the underlying logic that can truly sustain a market comeback lies in crude oil prices falling after the Strait of Hormuz resumes navigation, and the subsequent cooling of U.S. inflation expectations. Therefore, the market's vital point remains in the hands of crude oil and the Middle East situation.

Let's first look at crude oil prices. As we previously predicted, crude oil futures prices finally broke below the neckline, forming a clear "head-and-shoulders top" pattern. According to technical theory, after the neckline breaks, the downward space is roughly consistent with the distance from the head to the neckline, so theoretically we can see the level around $65. This seems to give us a strong bearish signal, and the first leg of the crude oil bearish rally has indeed occurred:

However, hold on! We absolutely cannot prejudge that crude oil will plunge to $65 in one go.

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From a technical standpoint, on the daily structure, although crude oil has shown a top divergence and head-and-shoulders top, looking at the medium-to-long term, crude oil has not completely broken below the uptrend line and remains within a consolidation range.

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More critically, the real fundamental picture does not support crude oil plunging rapidly.

First, war between the U.S., Iran, and Israel could erupt again at any time due to:

1. The so-called memorandum of understanding currently signed only provides a negotiation agenda framework for the next 60 days of peace talks, and the ceasefire agreement has not been signed.

2. The ceasefire agreement must be signed on November 19; whether Israel will obstruct with firing before this is uncertain.

3. The current ceasefire agreement includes Israel and Lebanon regions, but Israel has explicitly stated it will not listen to the U.S. and will continue fighting. Therefore, from now until November 19 (Dragon Boat Festival), crude oil may not move significantly. We must be careful when trading futures and wait until the agreement is definitively signed on November 19 before considering shorting crude oil.

4. Currently, most ceasefire agreement news comes from the U.S., Pakistan, and other countries; Iran's position is not particularly clear. Moreover, the agreement does not include the Iran nuclear deal or explicit content on uranium enrichment, indicating Iran has not clearly yielded on this issue.

5. Even if a 60-day ceasefire agreement is indeed signed on November 19, the relationship between the two countries will remain unstable during these 60 days. I judge that the U.S. is currently holding things back to prevent escalation, continuing until the midterm elections end. Note that 81 days after the 60-day period following November 19's ceasefire signing, the midterm elections begin. Therefore, it is highly likely Trump will use this method to keep the U.S.-Iran situation in a state of fighting and stopping without escalation, providing a moderate environment for his election.

Regarding oil prices, note:

1. Even if the ceasefire agreement is reached, normal navigation may still take weeks to months because the Strait of Hormuz is currently covered with sea mines.

2. Even if the ceasefire agreement is reached, the 10 million barrels per day production gap from closures and losses in the Middle East will require at least 3 months to recover. Therefore, during this period, I believe crude oil will not fall so quickly.

3. Although Iran's oil embargo will be removed in this agreement, I judge the impact is actually not significant. First, the oil embargo measures have not had substantial practical effect—China, Russia, and India continue to purchase large quantities of Iranian crude oil, so removing the embargo may not have particularly large impact. Second, this embargo removal is still pending implementation during the 60-day observation period. Therefore, everything depends on whether the agreement is signed on November 19 and what the signed details are. Only after these emerge can we judge the future direction.

4. Currently, although crude oil has fallen, the entire futures price structure has not changed. For WTI crude oil at $65 per barrel, the futures market expectation is until 2030:

U.S. Equity Rebound Is Unstable—Buy the Dip with Caution

Since crude oil cannot fall rapidly and significantly, this lagging indicator of inflation will also be difficult to cool comprehensively in a short time. This directly determines that the current rebound in U.S. equities is unstable.

Before I personally see large numbers of vessels passing through the Strait of Hormuz, I absolutely will not bet heavily on U.S. equities going long. Although Goldman Sachs' institutional seat data shows institutions have not sold off U.S. equities significantly, with risk exposure continuously maintained at historical highs, indicating the medium-to-long term bullish trend remains robust, the short-term seasonal volatile phase danger has not passed.

At the same time, we must also note that the 10-year U.S. Treasury yield has not touched bottom and broken below the uptrend; upward pressure continues to exist.

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Selling Options: An Appropriate Choice Under Current Conditions?

During this contradictory phase of "looking long but trading short," major single-direction rallies may be difficult to emerge. We must be careful when trading futures and need to wait until the agreement is definitively signed on November 19 and details are clear before considering whether there are further directional opportunities (such as shorting crude oil).

Regarding current operational strategy, for U.S. equities and U.S. Treasuries, selling options (particularly selling puts) may be an appropriate choice for capturing high-level volatility profits.

1.U.S. Treasury Strategy (TLT): Although crude oil is bearish short-term, inflation expectations will definitely trend downward before Israel triggers war again. At this time, rolling selling TLT puts at or below the bottom $83 is a medium-to-long term strategy worth considering. $iShares 20+ Year Treasury Bond ETF(TLT)$

2.U.S. Equity Tech Stock Strategy: For AI-related large tech stocks like Micron, we are not yet at the point of fully confident long positioning. Consider using a selling-put strategy below the 20-day moving average (red line in the chart below) to capture time value during the high-level consolidation phase: $NVIDIA(NVDA)$ $NVIDIA Portfolio(BK4609)$ $Micron Technology(MU)$

For Nvidia, based on current technical trend, selling puts below the strike price at the lowest price after the previous decline is more appropriate—such as below the horizontal yellow support line in the chart below:

However, we must emphasize: at this stage, be cautious and use light positions. Once the stock price breaks below the strike price, you must decisively stop loss.

3.Defensive Sector Allocation: If you really feel tempted to buy spot positions, consider the healthcare sector (XLV). Currently, XLV's ratio to the S&P 500 has fallen to the lowest level in nearly 25 years, possessing relatively high safety margin. For the healthcare sector, do you have stocks you like? Leave a comment for Owen and let's discuss. $Health Care Select Sector SPDR Fund(XLV)$ $UnitedHealth(UNH)$