Saturday, August 24th, 2019

Oil Options Trading


Crude oil prices have fallen into the sixty dollar a barrel range taking oil stocks on a downward ride. Oil options trading is active as many traders think it is time to bet on a turnaround. Likewise Reuters reported massive options action in the Energy Select Sector SPDR after OPEC announced that it will not cut back on oil sales.

Activity in the options on the Energy Select Sector SPDR Exchange-Traded Fund exploded on Friday as traders who had bet on a drop in the ETF scrambled to book hefty profits a day after OPEC decided not to cut oil output. One trader was estimated to be pocketing $25 million on a block of puts on the XLE bought just 10 days ago, according to market watchers.

The energy ETF, which has shed about a fifth of its value over the last three months, was down 6 percent at $79.82 on Friday, reacting to the OPEC’s decision to not cut oil production as a way to stem a slide in global prices. XLE options contract volume was at 428,000 or about 5 times the norm, making it the fourth-most-traded options name on Friday, according to Livevol Inc data.

The most profitable bet over the last months has been for the oil glut to drive prices down. Speculation led to the most profits in oil options trading as no one knew for sure what OPEC would do with production.

Out of the Money Options Provide Record Profits

Everyone seemed to be sure that OPEC would cut back on production. As such there were many out of the money options contracts that immediately became very valuable when OPEC announced that it would not put a cap on production. Bloomberg comments on oil options that turned to gold in this circumstance.

January West Texas Intermediate $70 puts, which allow an investor to sell futures at that level, have soared more than 40-fold from two months ago as the U.S. benchmark has plunged almost $25 a barrel. They were trading near 50 cents at the end of October and worth less than 10 cents two months ago.

WTI dropped below $70 yesterday for the first time in more than four years after the Organization of Petroleum Exporting Countries said it will maintain its collective output target at 30 million barrels a day. Analysts surveyed by Bloomberg were split evenly before the meeting over whether OPEC would make the cut. The $70 puts have more than doubled since Nov. 26, before the meeting.

The question now is when is enough? When will oil futures, oil stocks and the price of crude start to rise again? Oil options trading typically gives us a clue.

What Does the Options Market Predict?

An article in Barrons notes that the options market forecasts substantial volatility coming up based on the OPEC decision.

Based on options that expire Friday, the options market predicts a 3.8% move either up or down by the end of Friday in the United States Oil Fund. In the Energy Select Sector SPDR Fund (XLE), which own shares of big oil companies such as ExxonMobil (XOM) and Chevron (CVX), the expected move is 2.2%.

Oil options trading is likely to be brisk until it becomes clear just where oil prices will settle.

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