Trump-Iran Countdown Finds Investors More Bearish in Oil Options

(Bloomberg) -- In the hours before President Donald Trump announces to the world whether he pulls the U.S. out of the Iran nuclear agreement, bears are driving the oil options market.

Leaving the 2015 accord might imply new sanctions on the Islamic Republic, potentially curbing oil supply and boosting prices. Yet traders are signaling that scenario may be fairly baked into June crude futures traded in New York. Implied volatility, a proxy for options costs, has jumped about 12 percentage points since Friday for benchmark put contracts. That’s a bigger jump than for corresponding calls.

Spot futures prices for WTI and Brent both fell as of mid-day in London. Trump is expected to announce his decision at 2 p.m. New York time.

In the weeks before President Trump’s decision, bulls had been the dominant force in the options market. Traders had racked up almost 137 million barrels worth of bets on the global Brent benchmark surpassing $80 over the next 12 months, while some calls reached their most expensive relative to puts since 2014 last month.

Even with the surge, options traders on both sides of the trade may be underestimating a Trump surprise. Price swings on the Brent contract don’t fully capture the risks of a return to sanctions for Iran, Bank of America Merrill Lynch analysts including Francisco Blanch wrote in a report.

“The volatility experienced by aluminum cash prices and regional price differentials on the back of U.S. tariff and sanction policy uncertainty is a warning sign for market participants” in oil, they said.

The bias toward puts has probably also been helped by a futures market that jumped on Monday to the highest in three and a half years, and an appreciating dollar that typically dims the appeal of the commodity.

The implied volatility of options protecting against a 20 percent drop on June futures jumped to about 50 percent since Friday. For comparable call options to protect against a rally, volatility has jumped to 43 percent, according to price data compiled by Bloomberg.

©2018 Bloomberg L.P.

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