23 January 2018 at 13:44 GMT
- Bullish bets on WTI rose to a record 483,000 lots last week
- Options market shows some traders seeking downside protection
- Cost of downside protection on the rise
By Ole Hansen
While the oil market is quiet on the surface with current news flow continuing to provide support, the options market shows increased demand for downside protection; this makes sense considering how one-sided the speculative bets have become.
Corrections of between 10-15% have previously been seen once the music stopped and traders began booking profit.
Riding the current momentum is often much easier than trying to pick a top or a bottom. On that basis, using options to express the opposite view of the current trend could end up being a less costly manner of looking for a correction.
Hedge funds increased bullish bets on WTI crude oil to a record 483,000 lots last week with the long-versus-short ratio almost reaching 15:1, the highest since mid-2014.
While the price of crude oil has been moving higher, so has the cost of protecting the downside through options. The WTI crude oil volatility curve remains heavily skewed towards puts as per below.
Activity in the options market during the past week has centred on protecting the downside with the three most traded strikes being puts. Bloomberg reports that the most active strikes in Mondays trading were the March $57 and $55 puts which traded 18,000 lots each, including two 5,000-lot blocks.
Assuming this was a put spread the price that traders paid for this structure was $0.07/b.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank