(Bloomberg) — Traders are piling into options as supply disruptions from the war in Iran send oil and other commodity prices soaring.
Implied volatility for oil has jumped to rarely seen levels as producers, airlines and utilities hedge like never before, while that for European natural gas reached the highest since 2023. CME Group Inc. said its energy complex saw record daily volume on Friday, at more than 8 million contracts.
“This is clearly one of the biggest volatility events that has taken place in 20 years,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “You have to look at everything, including physical market indicators that aren’t showing up on the screen. Your head is literally on a swivel.”
Oil has been at the center of the action, with flows through the Strait of Hormuz — which normally handles around one-fifth of global shipments — nearly halted. West Texas Intermediate futures jumped 12% on Friday, capping the biggest-ever weekly gain.
Traders are gearing up for even higher prices, with many calling for $100 a barrel. The United Arab Emirates and Kuwait have started to reduce oil production, adding to the supply woes. WTI options volatility jumped Friday to the highest level since Covid, with the skew — gauging the premium of calls versus puts — at one point reaching the the most bullish reading in data compiled by Bloomberg back to 2015.
Oil traders were shifting positions upward as prices kept climbing above $90. For example, on Friday, April $120/$150 call spreads traded, appearing to roll a position higher.
“The rate of the vol move is accelerating faster than the rate of open interest,” said Babin. “That tells us we’re getting into a situation where dealers are hesitant to take this risk.”
The bid for calls extends along the term structure to more of a degree than following the US bombing of Iran’s nuclear sites last year. That suggests investors see risks extending beyond a short-lived flare-up, according to Bloomberg Intelligence’s chief global derivatives strategist Tanvir Sandhu.
The shipping halt also disrupted Middle East liquefied natural gas supply, delivering a fresh blow to the European natural gas market that’s still recovering from massive price spikes in 2022 after Russia’s invasion of Ukraine.
There was an especially sharp reversal in the Dutch TTF market. The conflict erupted days after many investors had turned more bearish, leaving the market primed for a rally.
As a result, implied volatility has more than quadrupled since the start of this year and now sits near the highest since the summer of 2023.
The interruption of Middle East LNG shipments and the surge in prices have had ripple effects on metal and fertilizer producers.
Aluminum prices have spiked as the disruptions forced producers of the metal in Bahrain and Qatar to halt shipments. While the market had been climbing and traders becoming more bullish, option buying reached another level in the run-up to the conflict.
A trader bought a huge call spread in late February on the London Metal Exchange as tensions mounted — now that $40 million wager has come into the money as prices spiked. Implied volatility of front-month options has soared far above realized moves as traders pay higher and higher premiums to protect against potential wild swings.
The US agriculture market is feeling the effects as well. Options traders are betting that corn prices already boosted by the rise in fuel and disruption to fertilizer supply will keep pushing higher.
A trader spent more than $5 million Thursday on $5.50/$6 call spreads, locking in 160 million bushels worth of protection against a further 20% rally in September futures. Additional big trades on Friday pushed daily call volume to the highest in since mid-2024.
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