The recent spike in oil futures, particularly in the options market, reflects growing concerns among traders about the potential for a significant price increase. The call skew on second-month West Texas Intermediate futures has reached its highest level since March 2022, echoing the anxieties that arose during Russia’s invasion of Ukraine. This surge in options activity suggests that traders are increasingly hedging against the risk of a sudden disruption in oil supply, similar to the one that occurred when millions of barrels per day from Russia were temporarily withheld from the market, reports Fortune.
Escalation In the Middle East
In a stunning turnaround, hedge funds, commodity trading advisors and other money managers raced to reverse positions that in mid-September had turned bearish on crude on concern that slower economic growth in China and elsewhere would crimp demand just as OPEC+ producers were getting set to boost supply. About two weeks ago, put volume peaked, with traders paying up for bearish options as futures slumped toward $70 a barrel.
But the escalation in the Middle East has changed everything. While some traders got out of calls they had previously sold, most are now looking to buy insurance against a surge in prices.
“We have seen a sizeable 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 a high from October of last year, “which seems reasonable given that this escalation is potentially more impactful on oil supplies.”
Commodity Bullishness
The stress on the market was seen most in short-dated contracts, with the term structure for 25-delta options showing that the bullish trading spiked in recent days. Implied volatility for December calls climbed more than 30 points last week, more than triple that for puts, while there was almost no change for either bullish or bearish positions for July contracts and onward.
The bullishness for the commodity — both on Brent and WTI — has exceeded that for producers, which are likely to see a benefit only if prices remain higher for longer. Volatility and call skew in one-month options on the US Oil Fund LP exchange-traded fund both surged more than for the SPDR S&P Oil & Gas Exploration & Production ETF.
“The escalation in the Middle East has sparked a massive amount of short covering in crude oil as CTAs have flipped from short to neutral,” said Rebecca Babin, senior equity trader at CIBC Private Wealth Group. “Fundamental energy investors remain fairly sour on 2025 and are using call options as opposed to chasing the rally in crude to get upside exposure to a potential supply disruption.”
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Source: Fortune
