Oil’s Surge to $60 Hits a Mammoth Options Position

There are currently almost 150,000 contracts to buy Brent crude at $60, according to exchange data compiled by Bloomberg. The last time headline prices where at this level, about a year ago, the equivalent contracts stood at only 100,000.

Traders of the derivatives say the current layer of so-called at-the-money call options is elevated, and normally prices might be expected to surge as banks hedge their exposure to such positions by buying futures. For now, though, the impact may be muted.

Many of the call options are legacy positions of oil producers, which sometimes sell bullish calls to cheapen the hedges they use to guarantee revenues. Holding them leaves the banks relatively comfortable with what’s known as gamma — a measure of options market risk — meaning they may not feel the need to buy extra futures as the market rises.

But buying activity could pick up if crude keeps on grinding higher. The recent rally has been a fillip for many market speculators, who for months have been busy snapping up options that would profit from a climb into the $60s and $70s. Last week, the ratio of bullish Brent bets to bearish ones climbed to its highest level since mid-2019.

That may mean issues for the market ahead, as the calming effect of producer hedging might be missing at higher price levels, particularly if crude approaches $70.

The bullishness shows up in one of the market’s more esoteric gauges too. The premium traders are willing to pay for bearish Brent put options over bullish calls has narrowed markedly over the last couple of weeks.

With bullish options in demand, the global benchmark is also attracting inflows as a result of the positive yield it’s been offering investors so far in 2021. With nearby contracts trading at a premium to later ones, it’s profitable for investors to buy oil futures and roll them forward, and money managers have added about $6 billion of bullish money to Brent futures and options this year. That’s another marker that investors will be watching closely as they try to gauge whether the oil market will overshoot its fundamentals.


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