By Devika Krishna Kumar
(Reuters) – With the price of oil finally touching $ 50 (£34) a barrel this week, producers and speculators have been loading up on options to protect themselves from a downside risk, signalling there are still some jitters surrounding the recent rally.
Deep out-of-the-money put options – options that would not be profitable until a substantial pullback in the price of oil – have shown a marked increase in implied volatility, a sign that producers are locking in prices close to levels for them to be profitable while speculators are protecting themselves from a potential correction.
U.S. crude (CLc1) has nearly doubled from 12-year lows touched in February. Market sources say much of that rally was fuelled by the perception of the improving fundamental picture, with falling U.S. output and global supply outages helping to rebalance a market reeling from oversupply for nearly two years.
That has prompted hedging among producers. The current put skew – the difference in implied volatility for out-of-the-money and in-the-money options – is fairly typical of a market where producer hedging is prominent
John Saucer, vice president of research and analytics at Mobius Risk Group in Houston, said implied volatility has lately been cheap, making options attractive for those either protecting against or betting on downside.
Options expiring in 12 months show a strong bias in favour of out-of-the-money puts, which are trading at a much higher premium than similar out-of-the-money call options. That’s in part due to producer hedging, which involves selling those long-dated calls while buying puts or put spreads.
On Friday, the most actively traded are the $ 44 July puts, which had traded over 3,300 lots by noon ET (1600 GMT).
Among longer-dated options, open interest in the $ 40 December 2016 puts
For December 2017 maturities, the two most active options were the $ 40
With crude at $ 50 a barrel, hedging could intensify, said Jesper Dannesboe, senior commodity strategist at Societe Generale. Next month’s meeting of the Organization of the Petroleum Exporting Countries (OPEC) added to concerns.
“Whether you’re bullish or bearish, you’re going to have jitters going into this week because you’ve got this huge variable event and there’s some level of uncertainty,” Saucer said.
(Editing by Alistair Bell)
