(Bloomberg) — Oil futures posted their biggest gains in more than a year last week. And the frenzy was even greater in the options market.
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As traders worried about the risk of a major price spike, the call skew on second-month West Texas Intermediate futures jumped to the highest level since March 2022, when Russia’s invasion of Ukraine sparked concerns that millions of barrels of oil per day could be one of the best producers in the world would suddenly disappear from the market.
In a stunning reversal, hedge funds, commodity trading advisers and other money managers rushed to unwind positions that had turned bearish on crude oil in mid-September on concerns that slower economic growth in China and elsewhere would dampen demand. contract just as OPEC+ producers were about to start producing. increase the supply. About two weeks ago, put volume spiked, with traders paying for bearish options as futures fell to $70 a barrel.
But the escalation in the Middle East has changed everything. While some traders are halting calls they had previously sold, most are now looking for insurance against a rise in prices.
“We have seen a significant bid in volatility and increased demand for upside exposure to oil prices,” said Anurag Maheshwari, head of oil options at Optiver. Implied volatility has surpassed last October’s high, “which seems reasonable given that this escalation may have a greater impact on oil stocks.”
Last week, traders took advantage of Brent crude’s December calls to bet on oil reaching $100 or higher, with total call volume hitting a record on Wednesday. WTI futures rose as much as 11% amid concerns that Israel could attack oil facilities in retaliation for the Iranian missile attack, raising fears of a supply disruption in the Middle East. Concerns eased slightly on Friday as US President Joe Biden sought to discourage such a move.
According to data from ICE Futures Europe, money managers’ net long positions in Brent crude rose by more than 20,000 contracts in the week to October 1, continuing a bullish shift that began in earnest after China announced a massive stimulus package to strengthen its economy.
“Options traders had given up on the idea of a rally, leaving oil call implied volatility at near multi-year lows,” said Carley Garner, senior strategist and founder of DeCarley Trading. “Essentially, the market was not prepared for the surprise, and we are now seeing FOMO as prices finally move in favor of the bulls.”
In addition to immediate crude oil prices, traders also took bizarre bets on the sharp rise in the futures curve structure. More than 5 million barrels were bet on the nearest Brent spread, reaching $3 per barrel traded last week – it was at 62 cents on Friday.
The market tension was most evident in short-term contracts, with the term structure for 25-delta options showing bullish trading peaking in recent days. Implied volatility for December call options rose more than 30 points last week, more than triple that for put options, while there was virtually no change for either bullish or bearish positions for July contracts and beyond.
The bullishness for the commodity – both Brent and WTI – is greater than that for producers, who are only likely to see upside if prices stay higher for longer. Volatility and call skew in the one-month options on the US Oil Fund LP exchange-traded fund both rose more than for the SPDR S&P Oil & Gas Exploration & Production ETF.
“The escalation in the Middle East has led to a huge amount of shorting in crude oil as CTAs have gone from short to neutral,” said Rebecca Babin, senior equities trader at CIBC Private Wealth Group. “Fundamental energy investors remain fairly downbeat about 2025 and are using call options instead of chasing the rally in crude to gain upside exposure to a potential supply disruption.”
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