(Bloomberg) -- Oil traders flocked to the options market as they hedged against escalating geopolitical risk from renewed conflict in the Middle East.
Brent call option volumes Tuesday were the highest since early June, as was implied volatility, a gauge of how much traders are willing to pay up for protection against price swings.
Since the conflict between Israel and Hamas erupted in October, oil options markets have seen spurts of elevated activity because of the risk posed by wider hostilities in a region responsible for a third of the world’s oil production. There was a fresh surge in April when Iran and Israel traded direct attacks, but each time any move in options pricing eventually reversed.
Prior to the most recent escalation, crude volatility fell to multiyear lows, with prices swinging primarily within a $17 range this year. That would be the smallest annual band since 2003.
In addition to growing call volumes, the premium of bearish contracts over bullish ones has narrowed significantly, according to data compiled by Bloomberg, and it continued to do so early Wednesday.
“The uncertainty certainly helps in terms of volatility being better bid, and the volume on calls reflects demand for insurance,” said Harry Tchilinguirian, group head of research at Onyx Capital Group.
“But if the broader momentum is the market is down, I would not be surprised to see some players opportunistically buy put spreads,” he said, referring to wagers on prices potentially declining.
Brent call options traded 168,000 times Tuesday. At-the-money implied volatility climbed to about 25%, also the highest since early June, and edged higher Wednesday.
Crude futures posted the biggest intraday gain since April.
©2024 Bloomberg L.P.