Brent Oil Options Seen Offering Best Returns on Producer Hedging

Options tied to Brent crude offer investors the biggest returns of any commodity class because of the extra cost oil producers and consumers pay to hedge against price swings, Deutsche Bank AG said.

Brent scored highest among 11 commodities tracked by Deutsche Bank where it measured the gap between implied volatility, used to gauge the cost of options, and actual price fluctuations. Investors can profit by selling Brent options and hedging the exposure with futures contracts, according to Deutsche Bank.

“The reason why this is richer in Brent crude oil than some of the other commodities is because you have much more hedging activity in crude oil,” Sorin Ionescu, head of commodities structuring at Deutsche Bank in London, said by phone on May 13. “There is a natural community of hedgers and options buyers in crude oil, more than maybe in the case of precious metals or agricultural commodities.”

The Frankfurt-based lender started the Deutsche Bank Brent Short Volatility Strategy Index in March. The index has climbed 5.6 percent since March 1. Other contracts monitored were WTI crude, gold, silver, aluminum, copper, nickel, zinc, corn, soybeans and wheat.

Options are derivatives that give holders the right to buy or sell underlying assets at pre-set levels. Implied volatility is a measure of expected swings in underlying prices and is a component of an option’s cost. Historical, or realized, volatility measures actual price changes.

Brent crude futures traded for $109.79 a barrel on the ICE Futures Europe exchange in London today. Implied volatility has been 6.4 percent higher than realized volatility for the grade since 2010, compared with 4.7 percent for WTI crude, 4.5 percent for copper, and 1.9 percent for soybeans, Deutsche Bank estimates.

Levels of hedging in Brent through options are buoyed by consumers such as airlines, as well as producers involved in higher-cost extraction projects, according to the bank.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

To contact the editors responsible for this story: Alaric Nightingale at anightingal1@bloomberg.net James Herron, Andy Reierson

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