By Mahnaz Yasmin and Atkarsh Shetty
March 6 (Reuters) – Oil options and futures signaled that the latest Middle East war may be short-lived, as traders dive into structures that take advantage of a pullback in prices after an initial surge.
The options and futures markets often provide an early signal of whether traders see a supply shock as temporary or structural, creating opportunities to profit from sharp price changes.
The Israeli-American attack on Iran has sent shockwaves through energy markets as war risk insurance costs have soared, shipping rates have hit record levels and oil flows in the Strait of Hormuz have been disrupted by hundreds of ships. Oil prices hit multi-year highs on Friday.
In a sign traders see the price shock as temporary, implied volatility in 30-day cash Brent rose 17.5 points to 68% over the past week on Tuesday, while the 60- and 90-day tenner rose just 5.9 and 2.8 percentage points, LSEG data showed.
“What we’re seeing in real time is the difference between the logistics crisis and the structure,” Brian E. Kinsella, a former energy expert at Goldman Sachs, told the Reuters Global Markets Forum.
“The market is betting that it’s logistical and I think that’s the correct reading,” he added.
The Brent futures curve sends the same signal.
The spread between the first-month Brent contract and the six-month contract widened to about $10, the biggest retreat since the Russia-Ukraine war in 2022, pointing to tight near-term supplies while suggesting short-term disruption.
Meanwhile, the call ratio on West Texas Intermediate options fell to around 0.35 on Friday, CME data showed, indicating buying of calls before rebounding to 0.56 on Tuesday as demand returned for downside protection.
A call option gives the holder the right, but not the obligation, to buy a crude futures contract at a specified price, while a put option gives the right to sell.
At the same time, the ratio compares bearish put options, which benefit from declines, with bullish call options, which benefit from rising prices to gauge market sentiment.
“Traders are already short a significant amount of these deep out-of-the-money calls, creating a more negative gamma profile in crude oil,” said Rebecca Babin, senior energy trader at CIBC Private Assets US. This is in contrast to a more normal environment where traders are long gamma and sell in rallies.
Gamma shows how much the option’s sensitivity to the futures price (delta) changes if the market moves.
