Oil traders are purchasing protection against a potential spike in prices at an unprecedented rate, spurred by concerns that escalating protests in Iran could disrupt supply. Monday marked the busiest-ever single day for Brent Crude call option trading, building on a surge that began the previous Friday. Implied volatility and the premium for bullish bets have extended their climb since late last week, reaching levels not seen since the US and Israel bombed Iran last June, indicating increased demand for upside insurance.
Preliminary data from ICE Futures Europe reveals that over 556,000 calls changed hands on Monday. This activity was driven by large spread trades in nearby months, offering relatively inexpensive bets on a sudden price surge should a disruption occur. Brent futures have increased by more than 6 per cent since Wednesday, partly due to the threat to supply from OPEC’s fourth-largest producer, compelling traders to cover substantial bearish wagers that had anticipated an oversupply early in the year.
While Tehran claimed to have suppressed protests on Monday, reports suggest unrest continues. Adding to the uncertainty, The Wall Street Journal reported that US President Trump is considering military action against Iran, citing US officials. Given the uncertain US response, options provide a versatile hedge against various outcomes, ranging from military escalation to supply disruptions resulting from protests by Iranian oil workers.
Significant volumes of April $US74/$US78 and $90/$100 spreads, each equivalent to 40 million barrels, were traded in single clips, representing substantial activity in the oil options markets. The global benchmark’s second-month options “skew”, which measures the relative cost of protecting against a price spike, has shifted since mid-last week to favour calls, a market condition typically seen during periods of geopolitical tension. This surge highlights a sharp reversal in sentiment from the beginning of the year, when expectations of increased Venezuelan production compounded bearish sentiment regarding growing global supplies.
