Oil Traders Crowd Around Cheap TACO Hedge as Iran War Escalates

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(Bloomberg) — An unusual options trade is becoming a favored hedge against the risks of sudden U-turns in US President Donald Trump’s stance on Iran, a dynamic that has repeatedly whipsawed markets in recent months. 

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About 400 million barrels’ worth of $1-wide put spreads have traded since the middle of last week as Trump vacillated over policies ranging from expanded military action in Iran to tolls on shipping through the Strait of Hormuz. On Thursday alone, some 70 million barrels of September $75/$74 put spreads traded on ICE Futures Europe. 

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It’s a relatively low-cost, albeit lower-reward, form of insurance against the “TACO,” short for Trump Always Chickens Out, dynamic that emerged last year as traders learned to navigate the US leader’s penchant for abrupt policy reversals. This week alone, Trump announced plans to impose a 20% charge on cargo shipments transiting the key energy chokepoint, only to walk back the threat a day later. 

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The appeal of the short-term, relatively inexpensive hedges has grown in a volatile market where, within a week, investors went from worrying about a looming glut to covering short positions after the US renewed strikes against Iran. An abrupt breakdown in a ceasefire between the US and Iran all but extinguished hopes that a mid-June thaw in tensions would lead to a normalization of traffic through Hormuz. Oil has since soared to the highest in about a month as skirmishes flared across the Middle East, including attacks on crude-laden vessels and on Gulf nations including Kuwait. 

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The strategy involves buying one options contract while simultaneously selling another, reducing the upfront premium. While the upside is generally limited, well-chosen strike prices can still generate attractive profits, according to brokers. Narrow spreads in the listed market are also often used to hedge over-the-counter binary, or digital, option positions, though several market participants said that digitals didn’t seem to be the sole type of trade here. 

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The strategy was also employed in a massive options trade in mid-May, when puts tied to 134 million barrels of Brent crude changed hands in a single $91/$90 spread. The buyer stood to make as much as $129 million if July Brent futures settled near $91 by the options’ expiration the following week. Prices ultimately reached that level — but only a few days too late, leaving the trader just short of a windfall.

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Similar trades are showing up to bet on a rally, though in much smaller volumes. On Tuesday and Wednesday, about 3.4 million barrels worth of Brent September $85/$86 and 11 million of November $100/$101 call spreads changed hands.

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The latest spate of attacks has also sent several key market gauges surging. Implied volatility and call skews for both Brent and West Texas Intermediate are hovering near their most bullish levels since April, as traders pay up for protection against higher prices. 

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