Oil traders have been quietly buying cheap, far out-of-the-money call options at $100 a barrel, betting that the biggest sell-off since the financial crisis has gone too far and that crude is likely to rebound by this time next year.
Open interest in U.S. crude oil $100 calls for December 2015 has jumped 13 percent in the last two weeks to nearly 37,000 on Wednesday, with a premium of around 40 cents.
For the December 2016 $100 calls, open interest has surged by more than 50 percent to nearly 16,000, with a premium of around $1.00, according to exchange data.
With U.S. crude oil futures for January hovering at just above $60 a barrel, down from nearly $108 a barrel in June, traders aren’t likely counting on those options to expire in the money but rather betting that their value will increase provided oil prices bottom out or begin to creep up next year.
“People don’t trade options because they think the price will necessarily get there. They’re looking for relatively good value,” said John Saucer, vice president of research and analytics at Mobius Risk Group in Houston.
“The question is: How do you get the most bang for your buck?” he said.
Since the summer, oversupplied global markets coupled with lackluster demand kicked off a selloff in both the U.S. crude and Brent contracts. The sell-off accelerated following the Organization of the Petroleum Exporting Countries (OPEC) meeting in Vienna last month, when member countries decided not to cut production amid speculation of a price war.
The motivations for investors to have so many open contracts in those two months at $100 are not immediately clear. High levels of activity in December are not a surprise as it is among the most liquid months of the year for hedging.
Yet, some argue that it is an opportune moment to buy as falling prices have increased the put skew – the difference in implied volatility for out-of-the-money and in-the-money options – allowing more upside potential to the call side.
“There are too many guys on the short side now,” said one trader. (Reuters)