MARKET NEWS
Option Frenzy From Oil to Corn Highlights Iran War Market Stress - BLOOMBERG
BY David Marino, Mia Gindis and Priscila Azevedo Rocha
(Bloomberg) -- Traders are piling into options as supply disruptions from the war in Iran send oil and other commodity prices soaring.
Implied volatility for oil has jumped to rarely seen levels as producers, airlines and utilities hedge like never before, while that for European natural gas reached the highest since 2023. CME Group Inc. said its energy complex saw record daily volume on Friday, at more than 8 million contracts.
“This is clearly one of the biggest volatility events that has taken place in 20 years,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “You have to look at everything, including physical market indicators that aren’t showing up on the screen. Your head is literally on a swivel.”
Oil has been at the center of the action, with flows through the Strait of Hormuz — which normally handles around one-fifth of global shipments — nearly halted. West Texas Intermediate futures jumped 12% on Friday, capping the biggest-ever weekly gain.
Traders are gearing up for even higher prices, with many calling for $100 a barrel. The United Arab Emirates and Kuwait have started to reduce oil production, adding to the supply woes. WTI options volatility jumped Friday to the highest level since Covid, with the skew — gauging the premium of calls versus puts — at one point reaching the the most bullish reading in data compiled by Bloomberg back to 2015.
Oil traders were shifting positions upward as prices kept climbing above $90. For example, on Friday, April $120/$150 call spreads traded, appearing to roll a position higher.
“The rate of the vol move is accelerating faster than the rate of open interest,” said Babin. “That tells us we’re getting into a situation where dealers are hesitant to take this risk.”
The bid for calls extends along the term structure to more of a degree than following the US bombing of Iran’s nuclear sites last year. That suggests investors see risks extending beyond a short-lived flare-up, according to Bloomberg Intelligence’s chief global derivatives strategist Tanvir Sandhu.
The shipping halt also disrupted Middle East liquefied natural gas supply, delivering a fresh blow to the European natural gas market that’s still recovering from massive price spikes in 2022 after Russia’s invasion of Ukraine.
