Oil traders have loaded up on call options as a spike in tensions in the Middle East raises the possibility of a surge in prices.
More than 300,000 Brent call option contracts traded on Wednesday, the largest one-day amount since the last round of elevated regional tensions in April. The volume was dominated by large call spreads, which offer cheaper ways to profit from a rally, including $87 and $90 spreads for October, as well as $110 and $130 spreads for November. Brent was last near $81.
The crude market is focused on the region on concerns that the conflict between Israel and Iran, as well as Tehran-backed proxies in Gaza, Lebanon, Yemen and elsewhere, may escalate, endangering crude supplies. The latest driver was the killing of senior Hezbollah and Hamas leaders, with the latter attacked while he was in Iran. Blaming Israel, Tehran has vowed to retaliate.
A call option gives the holder the right to buy an asset at a particular price on or before a set date. If oil spiked above $100, that would reward a trader who had an option for barrels below that price. For consumers, it could offer protection against costlier supplies.
With Brent surging 2.7% on Wednesday — the most since October — implied volatility has picked up from low levels. At the same time, so-called option skews are also now biased toward calls, reflecting heightened market risks. Call options for Brent are trading at a premium over the opposite puts, which give the holder the right to sell at a particular price.
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