What a difference a few days make.
Investors are willing to pay the most since mid-July to protect from a drop in U.S. crude prices by the end of the year, according to a measure of options values. That’s a reversal from Aug. 20, when the premium for puts over calls was the smallest in nine months. Puts give holders the right to sell futures at a certain price within a period, allowing them to potentially profit from a decline.
West Texas Intermediate futures tumbled Monday to the lowest level since 2009 on concern that Chinese demand is slowing just as Iran threatens to expand a global glut. Prices had risen on Aug. 20 as the outlook for a weaker U.S. dollar lured investors to oil, but the recovery was short-lived.
“There was some debate over whether prices could push lower,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by phone. “The last couple days have made it clear that there’s lower to go.”
The most active WTI options Monday were October $35 puts, which surged 38 cents to 66 cents a barrel on volume of 14,240 lots. It was the highest price since April. The second-most active were November $30 puts, with 8,138 contracts trading.
The so-called skew, measuring the premium for December 25-delta put options versus 25-delta calls, almost doubled in the past two trading sessions.
WTI crude for October delivery fell $2.21, or 5.5 percent, to $38.24 a barrel on the New York Mercantile Exchange Monday. It was the lowest settlement since Feb. 18, 2009. The December contract fell 5.4 percent to $39.65. Tuesday, October futures rose $1.37, or 3.6 percent, to $39.61 at 9:22 a.m.
The Chicago Board Options Exchange Crude Oil Volatility Index surged 12 percent to highest level since April. The gauge measures hedging costs on the United States Oil Fund LP, an exchange-traded fund tracking crude futures. Shares of the ETF dropped 5.6 percent to $12.49.