Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / Day Trading Crude Oil After the Strait of Hormuz Closure
Transcript
- Lucas: So crude oil is up about ten percent this week alone after Piper Sandler confirmed the Strait of Hormuz closure will likely last for months. And the thing that catches my eye as a day trader isn't just the oil spike itself — it's what the rest of the market is doing in response. Luna: You mean the VIX dropping to just under seventeen while oil is ripping higher. That's the part that feels off if you don't sit with it for a second. Lucas: Exactly. The VIX is at 16.94, down almost three percent over the past five sessions. Meanwhile the S&P 500 is up two point three percent in that same window, the Dow Jones is up two point two, and the Nasdaq is up a full three percent. So equity markets are basically saying 'this oil shock is manageable' — or at least that it's not a systemic threat to corporate profits. Luna: But for a day trader, the VIX being low doesn't mean volatility is gone. It means volatility has rotated into a specific sector. Oil and energy are where the action is. Lucas: Right. And that rotation is exactly what I want to drill into today. The small-cap index, the Russell 2000, is up six point three percent over the same five-day period — more than double the S&P 500's gain. That tells me money is flowing out of megacap tech and into more cyclical, energy-sensitive names. Luna: So the trade isn't just 'buy oil futures' — it's about which equities benefit from higher crude prices and which ones get hurt. Lucas: Let's start with the obvious beneficiaries. Exploration and production companies — the E&P names — are seeing their cash flows expand literally overnight. A mid-cap E&P stock that was doing fifty million in free cash flow at eighty-dollar oil could be doing seventy or eighty million at a hundred-plus oil. That leverage is what day traders can trade. Luna: And you're not talking about holding those for weeks. You're talking about intraday momentum plays on the news flow. Lucas: Correct. When a headline drops — say a tanker gets inspected or a diplomatic channel opens — the oil futures react in seconds, and the equities lag by maybe thirty to sixty seconds. If you have a screen set up with crude futures on one monitor and the XLE, the energy sector ETF, on another, you can catch that lag. Luna: But isn't that crowded? I feel like every algo on the Street is programmed to do exactly that. Lucas: It is crowded, which means you need an edge. My edge is the volatility term structure. When the front-month crude contract spikes far above the six-month forward, that backwardation tells you the market expects the disruption to be temporary. So I'll fade the spike when backwardation gets extreme — sell the second or third leg up intraday. Luna: So you're not betting against oil. You're betting that the intraday panic gets mean-reverted within the same session. Lucas: Exactly. And the other side of the trade is the laggards. Airlines, cruise lines, any transport name that burns jet fuel — those are getting hit. But the market has already priced in a lot of that. The real opportunity might be in the options market. Luna: Options on oil futures or on equities? Lucas: Both. But specifically, I'm looking at the VIX options. The VIX is low at 16.94, but the VVIX — the volatility of the VIX — is at 89.33, down five and a half percent. That's still elevated historically. If oil spikes again and equity markets get shaky, the VIX could pop twenty percent in a day. Buying out-of-the-money VIX calls as a hedge makes sense right now. Luna: So you're pairing a long oil position with a long VIX call to protect against the tail risk that the oil shock spills into a broader sell-off. Lucas: That's one structure. Another is a put spread on the S&P 500 if you think the equity market is too complacent. The VIX at 16.94 is below its long-term average of about nineteen. That's a signal that options are cheap. When options are cheap, you can buy protection without paying a premium that eats into your profits. Luna: Let me push back on that a little. The VIX being low doesn't always mean complacency. It could mean the market genuinely believes the Strait of Hormuz closure is a regional issue, not a global one. The US is a net exporter of oil now. The impact on the S&P 500 might really be limited. Lucas: That's a fair point. And the data supports it. The S&P 500 is at 7,519, up two point three percent in five days. The Dow is above fifty thousand for the first time. The market is basically saying 'this is not 1973.' But the nuance is that small caps are outperforming — the Russell 2000 up six point three percent — and that is a classic 'risk-on' rotation that happens when money leaves defensives and goes into cyclicals. Luna: And that rotation is exactly what a day trader can ride. If you're trading the IWM, the Russell 2000 ETF, you're capturing that momentum without having to pick individual small-cap stocks. Lucas: Which is smart because individual small caps can be illiquid. The IWM trades millions of shares a day. You can get in and out with tight spreads. And the options on IWM are liquid enough that you can do directional plays or volatility plays. Luna: One headline that caught my eye this week — completely separate from oil — was the Pope Leo statement about AI replacing human work. The article said traders share his concern long term. Do you think that's a factor in the rotation we're seeing? Lucas: Indirectly, yes. The AI narrative has been a huge driver of megacap tech stocks for the past two years. If investors start worrying that AI will displace workers faster than expected, that could hurt consumer spending and hit the broader economy. But for day traders, that's a long-term macro story. In the short term, the oil shock is the dominant catalyst. Luna: Still, it's worth noting that the Nasdaq is up three percent this week while the energy sector is up even more. So tech and energy are both rallying. That's unusual. Lucas: It is. And it suggests that the market is in a 'buy everything' mood as long as the VIX stays low. But that can change fast. If oil hits a hundred and twenty and stays there, you'll start to see margin pressure on companies that use a lot of energy. That's when the rotation out of tech could accelerate. Luna: So the key for a day trader is to have a plan for both scenarios: oil stays elevated but contained, or oil breaks higher and triggers a risk-off move. Lucas: Right. And that's why I'm sizing my positions smaller than usual this week. The range of outcomes is wider than normal, so the probability of a stop-out is higher. I'd rather make three trades at half my normal size than one trade at full size that gets whipsawed. Luna: That's disciplined. And speaking of discipline — and I know this is a bit of a pivot — one thing that keeps this show disciplined and ad-free is that it's listener-supported. A handful of people chip in monthly through buy me a coffee dot com slash fexingo, and that covers the costs of putting out episodes like this every day. Lucas: Yeah, it's a small group, but it makes a real difference. We don't run ads, we don't have sponsors telling us what to cover. That only works if the people who find value in the show throw a few bucks in the jar. If you've gotten a trade idea or a risk management tip that saved you money, that's the kind of thing that keeps us going. Luna: Totally. And we're not asking for a subscription or anything. It's just a coffee. But it's what lets us keep the show independent. Lucas: Alright. Back to the charts. One pattern I'm watching closely is the relationship between crude oil and the US dollar. The dollar has been weakening slightly, which is supportive for oil prices. If the dollar breaks below a key support level — say the 200-day moving average — that could be another catalyst for oil to rally. Luna: And if oil rallies on a weak dollar, that's a different kind of trade than a rally on a supply shock. A weak-dollar rally tends to be more gradual and more sustainable. Lucas: Exactly. The supply shock rally is sharp and mean-reverting. The weak-dollar rally is a trend you can ride for weeks. So if you see the dollar breaking down, you might want to shift from intraday scalping to swing trading energy names. Luna: What about the laggards? Are there any sectors that could see a short squeeze if oil spikes again? Lucas: Airlines are the most shorted sector right now. The short interest on the US Global Jets ETF is around fifteen percent. If oil suddenly drops — say a diplomatic breakthrough — those stocks could gap up. But that's a binary event. I wouldn't position for it unless you have a catalyst in mind. Luna: So your base case is: oil stays elevated, small caps continue to outperform, and the VIX stays low unless something breaks. And you're trading that by being long energy via the XLE or IWM, hedged with VIX calls at the 20 strike. Lucas: That's the core. And I'm watching the VIX term structure — if the front-month VIX futures go into backwardation, that's a warning that volatility is about to spike. Otherwise, I'm comfortable with the current setup. It's a day trader's market as long as the trends are clear. Luna: And the trends are clear: oil up, small caps up, megacap tech hanging in there. It's not a complicated market, but it's a fast one. You have to be on your toes. Lucas: That's the thing about day trading — when the setup is clear, the execution is everything. So know your levels, size appropriately, and don't get emotional about the headlines. The oil story is going to be with us for a while.