(Bloomberg) — Oil traders who bought options in a bet that crude oil would snap out of its doldrums are set to reap the rewards as prices surge on fresh sanctions against Russia.
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A gauge of implied volatility jumped by the most in two months as futures surged more than 3% after the US announced new sanctions on two major Russian energy companies. The move by the Biden administration threatens to curb exports from Russia, tightening a supply balance that had been expected to tip into surplus.
At the same time, WTI’s skew flipped to favor calls for the first time since Dec. 16, signaling traders are willing to pay more for bullish bets and cover wagers that prices would drop.
The jump in volatility could mean big returns for traders who bought straddles — a call and put option at an identical strike price. This hedge profits from swings in either direction, which would be a welcome change for traders after volatility had fallen by almost half from mid-October to mid-December.
The volatility was already starting to pick up and the bearish tilt to fade ahead of President-elect Donald Trump’s inauguration later in January. Trump’s social media posts during his first term sent oil futures swinging on multiple occasions, which may deter some traders from being short volatility.
Among the most active West Texas Intermediate options traded Wednesday was the February contract for $75. After settling at $0.43 that day, it’s now worth almost $2, providing a hefty windfall on paper for traders who held the contracts — unhedged — heading toward expiration Jan. 15.
The flurry of bullish activity also extended to niche corners of the options market. Traders piled into options betting that the premium of February futures over March will jump to more than $1 or even $1.50 as supply/demand balances tighten. Feb.-March rallied on Friday to as high as 98 cents, the strongest intraday level for the prompt spread since September.
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