(Bloomberg) -- A flurry of crude options that pay out if prices rally to $100 a barrel traded Wednesday, a sign some traders are looking to hedge against the risk of supply disruptions in the Middle East.
The equivalent of almost 27 million barrels of Brent December $100 calls traded by 11:20 am in New York while more than 7 million barrels worth of US crude December calls changed hands.
The flows were likely a mix of buying and selling, people involved in the market said. While some traders were seeking to protect against a short-term oil price spike, others had sold call options in recent weeks and were having to cover those positions.
“I think the $100 calls are like insurance policies for people with the hope that they become worthless,” said Scott Shelton, an energy specialist at TP ICAP Group Plc. “I still think the odds are against a material loss in production, but when it comes to geopolitics, its always a hard call.” He added that underlying supply and demand balances remain generally soft.
Brent crude on Tuesday posted its biggest daily price swing since March last year as Iran launched a missile attack on Israel and Tel Aviv vowed to retaliate. The moves rippled through an oil market that had amassed large bearish positions in the weeks prior.
Spiking interest in bullish call options has sent the value of those contracts surging. The value of $100 WTI and Brent calls is, for instance, at the highest since mid-August. Still, traders warn that the bullish positioning in options belies a market that is almost certainly facing oversupply in the coming months, with demand growth shaky and production from OPEC+ members and beyond set to rise soon.
While some of the contracts traded outright, others were spreads that involve simultaneously buying $100 calls and selling related contracts, like $120 calls, which limits the eventual profit from a rally.
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