Options data showed investors betting oil prices will rise further as escalating hostilities between Israel and Iran threaten to damage energy infrastructure in the Middle East.
Call options closed at a premium on Wednesday for the first time since mid-August. Trading volume in Brent crude call options hit a record high, driven higher by activity in contracts at and above $100.
It is rare for call options to appear at a premium in the oil market, although they have occurred a few times since the war between Israel and Hamas broke out last year.
Moves in options markets mirrored gains in futures contracts, which are all moving higher as the prospect of an all-out war in the Middle East threatens to disrupt oil production and transportation.
Brent crude has risen about 4% since Iran fired more than 100 ballistic missiles at Israel earlier this week, and implied volatility gauges have jumped to their highest level in nearly a year. More than 372,000 Brent call options changed hands on Wednesday, compared with an average of about 129,000 a day in September. Trading volume for WTI call options was also above average.
That suggests some traders are seeking to hedge against supply disruptions in the Middle East. Buyers of much of this volume stand to benefit if prices rise above $100 a barrel. More than 50 million barrels of call options betting on oil prices rising to $100 were traded.
Market participants said the flows were likely a mix of buying and selling. While some traders were trying to protect against a short-term surge in oil prices, others had sold call options in recent weeks and had to cover those positions.
“I think of the $100 calls as like insurance for people who are afraid they’re going to lose everything,” said Scott Shelton, energy expert at TP ICAP Group Plc. “I still think the likelihood of a material loss of production is low, but it’s always a tough call in terms of geopolitics.” He added that underlying supply and demand fundamentals remain generally weak.
Traders warn that bullish options positioning masks a market that will almost certainly face oversupply in the coming months, with shaky demand growth and OPEC+ production set to rise soon.
Additionally, while some contracts are straight trades, others are spreads of simultaneously buying the $100 call and selling a related contract (such as the $120 call), which limits the ultimate profit on a rally.
The article is forwarded from: Jinshi Data