Crude drop turns options bets worthless as Iran, Israel conflict simmers

(WO) — Traders who piled into bullish options bets on oil prices at record pace are waking up to a harsh reality: Most of those contracts are now worthless.

Israel refrained from striking Iran’s energy infrastructure in its long-awaited bombardment of the OPEC nation over the weekend, sending crude prices crashing. That plunge has helped contribute to a chunk of about 800,000 Brent December call options expiring without a profit on Monday as traders’ urge to protect against a price spike evaporates.

Much of the trading around the risks from the Middle East conflict this month has happened in options markets, outpacing action in futures prices. Speculation that the attacks could disrupt oil flows in a region that produces about a third of the world’s crude drove the total number of Brent options held by investors to a record high.

Of the contracts expiring on Monday, fewer than 10% had any value. That means that roughly 32 million barrels of $90 and $100 call options that were purchased since Iran attacked Israel earlier this month — triggering Israel’s vow for retaliation — were effectively wasted.

Almost 22 million barrels of $75 calls were worth about $35 million on Friday, while nearly 53 million barrels worth of $80 calls were worth about $22 million at that time. Both expired worthless on Monday.

“The Middle East remains a powder keg to me, but the urgency to trade oil from the long side is probably done,” said Scott Shelton, an energy specialist at TP ICAP Group Plc.

To be sure, not all of the hedges against a price spike have expired. Almost 130,000 Brent $100 calls are outstanding for the first six futures months of next year — about 70% more than there were at the end of September.

Some traders use options as a way to hedge their exposure to their physical operations such as producing or consuming oil, while others use them as a relatively cheap way to bet on the direction or volatility in prices.   

Traders also made a last-ditch effort to cash in on bearish bets ahead of the expiry, with more than 20 million barrels of December $70 put options changing hands on Monday. That helped to bring the skew — or the premium of bullish calls to bearish puts — to the smallest in nearly a month. The measure had surged this month to the most bullish leaning in more than two years.

“The market is not as short as it’s supposed to be due to geopolitical risks that sidelined the bears,” Shelton said. “They need to get involved, which means any significant rally will be sold.”