Oil Options Jump As Traders Seek Protection From Volatility

Oil traders have scrambled to scoop up options as additional protection against wild swings in prices, sending a key index to its highest level since the worst of the global economic crisis in 2008, data shows.

To hedge against volatility that has whipsawed oil prices this year, traders have positioned themselves more firmly on both sides of the market. They have jumped into various contracts, including March $25 puts and March $35 calls – which have hit record open interest in recent days.

Volatility, a gauge of options premiums and activity, for U.S. crude jumped to almost 69 percent on Tuesday, the highest since March 2009, according to Reuters Eikon data. In December 2008, it was above 100.

The flurry comes as oil benchmarks have tested new 12-1/2-year lows, falling nearly 8 percent on Tuesday, as one of the worst supply gluts in history looks likely to worsen and the possibility of coordinated action among OPEC and non-OPEC producers to rein in production has faded.

Nearly three weeks ago, Brent’s volatility jumped to the highest since late 2008 as traders rushed to snap up additional protection against an even more aggressive sell-off.

The volatility in recent weeks has also in part been spurred by investors racing to close out massive short positions, according to analysts and traders.

Short positions in the U.S. futures and options have hovered around the highs it touched in the week to Jan. 12, according to data from the Commodity Futures Trading Commission.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza