Magazine

What Options Are Telling Us


Could oil hit $200 a barrel in the next year? Some traders are betting it might. Others think it could fall below $60, vs. around $94 a barrel now. The betting action is in options on light sweet crude oil on the New York Mercantile Exchange. A call option gives its owner the right but not the obligation to buy 1,000 barrels of oil at a set price, known as the strike price; a put option gives its owner the right to sell at the strike price.

Call options are for bulls, while put options are for bears. The table shows that as of Nov. 14, someone had spent 12 cents per barrel for a contract giving him or her the right to buy 1,000 barrels of oil on or before December, 2008, at a strike price of $200 a barrel. The person is betting that the market price will go even higher and has reserved the right to buy oil at $200 and then sell it at a profit. This blue-sky bet is a lot more expensive than your average lottery ticket, since 12 cents times 1,000 barrels comes to a layout of $120 per contract.

On the bearish side, someone else spent 17 cents per barrel for the right to sell (or "put") oil at $50 a barrel on or before December, 2008. That's a bet on buying oil on the open market cheap, selling it for $50, and pocketing the difference.

Most options expire with zero value, but people buy them in hopes that something crazy will happen. As the New York Lottery says: You gotta be in it to win it.

By Peter Coy


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