Javier Blas, Bloomberg, has a nice piece on options activity in oil markets, here…
I do disagree with this:
”If we break above $90 a barrel, things will probably get spicy,” says Thibaut Remoundos, founder of Commodities Trading Corporation Ltd., which advises oil consumers and producers on options strategies. “As we rise above $95 and higher, the options market is set up to be a strong tailwind for the bulls.””
Call paper flow is more two way, with lots of spreads trading and non market maker call selling, not like puts where producers (think Mexico) straight out buy puts (and market makers accumulate a net short position)…. It’s possible that the market is so prepared for $100 that options act as a headwind… Market makers can delta hedge call spreads very easily, while call spread owners might not be be inclined to add to futures length if calls and call spreads are going in the money. We’ve seen this happen the first time crude approached $100. So no “gamma rush” that we sometimes see in puts when price move lower…
And, implied vols are flat as we move up strikes. The ATM $85 strike for March is 37.9 while the $95 strike 37.9 which implies a more balance paper flow than on the put side. The $75 strike settled at 43.7.
Let me repeat, all of this is a side show. We need to be very careful how we interpret options flow. All the bullish call activity is already in the market place via the market maker function. A market maker who sells calls will buy futures against it. We look at options flow as a check to our view on the market. Is what we are seeing, hearing, reading about the market actually showing up in the market place? If not, maybe we are missing something.
Of course it is possible for things to get “spicy” above $90, but that could come from funds kicking in which we noted are not at full capacity long yet, or something else…
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