The oil market is undergoing a dramatic sentiment reversal, with supply disruption fears sparked by protests in Iran prompting traders to buy call options on an unprecedented scale to hedge against price spikes, completely overturning the market's pessimistic expectations of a supply glut at the start of the year.
Bloomberg reported that trading volume for Brent crude call options hit a single-day record high on Monday, with over 556,000 contracts changing hands. This record follows a surge in trading last Friday, reflecting the market's high alertness to supply risks in Iran, OPEC's fourth-largest producer.
Both implied volatility and call option premiums have continued their climb that began over the weekend, reaching their highest levels since the US and Israel bombed Iran last June. This has forced short positions, which had bet on a supply surplus, to unwind urgently, with Brent crude futures rising more than 6% since last Wednesday.
Notably, the shift in market sentiment has been particularly abrupt. Just at the beginning of this month, the prospect of recovering Venezuelan production was fueling pessimistic expectations of a global supply glut, whereas geopolitical risk has now become the dominant narrative.
Monday's options trading was dominated by large-scale spread trades, which provide a relatively inexpensive tool for betting on sudden price spikes. According to preliminary data from ICE Futures Europe, April 74/78 and 90/100 spread contracts each saw 40 million barrels of oil equivalent traded in single transactions, which constitutes an exceptionally large trade in the oil options market.
Early signals of large bullish spread trades also emerged just before the close on Friday, including a 50 million barrel equivalent May 74/78 spread contract, foreshadowing Monday's explosive trading volume.
These spread strategies enable traders to hedge against a range of potential outcomes—from military escalation to supply disruptions caused by protests among Iranian oil workers—at a lower cost.
The "skew" for second-month Brent crude options has shifted in favor of calls since the middle of last week. This metric measures the cost difference between hedging against price increases versus price decreases. This market condition is relatively rare and typically only appears during periods of geopolitical stress.
Consultancy Energy Aspects noted in a report that traders' long gamma exposure had been limiting price volatility in recent weeks. However, a significant shift in options market positioning occurred last week, with heavy call buying putting traders into a short gamma state, removing the suppression on volatility.
Despite Tehran's claim on Monday that it had quelled the protests, unrest appears to be continuing. According to reports on January 10 local time, citing multiple informed US officials, US President Trump was recently briefed on options for military strikes against Iran and is seriously considering whether to launch an attack.
With the US response still uncertain, options provide traders with flexible hedging tools to prepare for various possible scenarios, from military escalation to supply disruptions. This market dynamic highlights how oil traders are rapidly shifting from a bearish stance at the year's start to a defensive posture in the face of fast-changing geopolitical risks.
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