Elevated oil prices, a primary driver of inflation, could last until President Donald Trump leaves the White House, according to Michael Schwartz, the dean of Wall Street's options strategists. Schwartz believes the Iranian regime is using the 1979-1981 hostage playbook to guide decisions during the current crisis with the U.S. Back then, Iran waited until Ronald Reagan defeated Jimmy Carter and was inaugurated to release hostages taken by students who stormed the U.S. embassy in Tehran.
"The Iranian terror regime will do everything it can to harm America, and interfering with the free flow of oil through the Strait of Hormuz is an effective way to increase global inflationary pressures, influence central bank policy, and even interfere with domestic U.S. politics," Schwartz, Oppenheimer's chief options strategist, told Barron's.
His views are informed by his nearly unrivaled experience helping clients navigate the markets. He was trading options before options were first listed on an exchange in 1973. As Wall Street's longest-tenured options strategist, he has been instrumental in the growth and development of the market.
While many investors hope Iran seeks a peaceful solution to the current standoff, Schwartz says that the longer Iran resists the U.S., the more respected Iran becomes in the Middle East. Also, Iran's influence over the Strait of Hormuz has exposed an American weakness: The economy needs oil, and Iran has an outsize influence on oil prices and supply that is difficult for America to control.
The Iran hostage crisis was so long ago that many active investors weren't yet born, or were too young to remember it. But Iranian revolutionaries captivated the world when they toppled the Shah, who was backed by the U.S. The revolutionaries stormed the U.S. embassy and took hostages. The hard-liners, who are the ideological parents of the present regime, were angry Carter let the Shah visit America for cancer treatment. America froze Iran's financial assets, but Iran diplomatically embarrassed America. For 444 days, despite a failed special-forces rescue, Americans were held hostage. Since then, Iran, a founding member of OPECs, has grown stronger and emerged as a global terrorism sponsor, Schwartz says.
During the hostage crisis, oil prices doubled to more than $39 a barrel in 1980 from about $15 in 1979. America's inflation surged. Since the Iran conflict began in February, Brent crude has increased to about $107 a barrel from about $65.
Paul Volcker, appointed Federal Reserve chairman just before the embassy attack, was forced to sharply increase interest rates to battle inflation. By 1980, U.S. interest rates were about 18%, a level so high, Schwartz says, that many investors turned away from stocks to buy bonds. The Fed recently raised rates to control inflation, and some market watchers have expressed concern that Volcker's playbook could be resurrected.
To trade Iran's playbook, Schwartz says investors can consider a December 2028 call-spread trade. The strategy, which entails buying one call option and selling another with a higher strike but the same expiration, allows investors to use a small amount of money -- relative to buying shares outright -- to position for a relief rally that Schwartz expects will occur when Trump leaves office.
With the State Street S&P 500 SPDR exchange-traded fund at $768.73, Schwartz suggests buying the December $825 call and selling the December $875 call, both of which expire in 2028. At $875, the maximum profit of the spread is $25. If the ETF is below $825 at expiration, the trade fails.
During the past 52 weeks, the ETF has ranged from $629.28 to $781.62.
To lower the cost of the trade, Schwartz says that investors can sell the December $615 put option for about $23.
"History may not repeat, but it often rhymes, and that often creates opportunity for investors," Schwartz says. "This strategy is intended to monetize that phenomenon."
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