Bloomberg News

Crude Oil Options Volatility Surges as Futures at Eight-Week Low

April 10, 2012

Crude oil options volatility surged as the underlying futures slid to an eight-week low on speculation that U.S. inventories rose last week and that the euro-region debt crisis is spreading.

Implied volatility for at-the-money options expiring in May, a measure of expected price swings in futures and a gauge of options prices, was 29.4 percent as of 2:30 p.m. on the New York Mercantile Exchange, up from 26.4 yesterday. Volatility is the highest since March 7.

“As the market drops, producers who are hedging their production will buy puts as will hedgers of long speculative positions,” said Vince Lanci, managing partner at Echobay Partners LLC, a commodity investment firm in Stamford, Connecticut. “You have a market that is long in general and all those people start running for the exits at the same time, and that will push volatility up.”

Crude for May delivery fell $1.44, or 1.4 percent, to settle at $101.02 on the Nymex after touching $100.75, the lowest level since Feb. 15.

The Energy Department will probably report tomorrow that crude inventories rose 2 million barrels last week to 364.4 million, the highest level for this time of year since 1990, according to the median estimate of 10 analysts surveyed by Bloomberg.

Spanish notes led a decline in the debt of Europe’s higher- yielding nations. German yields slid to records on concern that a slowing world economy will deepen the region’s debt crisis.

Volatility ‘Aggressive’

“Volatility was particularly aggressively bid today because of a large fear of a follow-through on this move, and Spain is not helping,” Lanci said.

The most-active options in electronic trading today were May $100 puts, which rose 35 cents to $1.08 a barrel at 2:38 p.m. with 3,433 contracts trading. June $105 calls were the second-most active with 2,554 lots changing hands. They declined 39 cents to $2.29 a barrel.

Puts accounted for 53 percent of electronic trading volume. One contract covers 1,000 barrels of crude.

The exchange distributes real-time data for electronic trading and releases information the next business day on floor trading, where the bulk of options trading occurs.

Bearish bets accounted for 50 percent of the 99,451 trades in the previous session. May $95 puts were the most actively traded, with 8,522 lots changing hands as they fell 2 cents to 12 cents a barrel. The next-most active options, June $135 calls, declined 2 cents to 9 cents on volume of 5,927.

Open interest was highest for December $80 puts with 46,887 contracts. Next were December $150 calls with 39,086 lots and December $100 calls with 34,928.

To contact the reporter on this story: Barbara J Powell in Dallas at bpowell4@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net


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