WTI Options Volatility Slips on Speculation Rally to Be Limited

Crude oil options volatility sank as traders, caught off-guard by the rally in futures today, bet that price swings will be limited.

Implied volatility for at-the-money January options, a measure of expected futures movements and a key gauge of value, was 17.82 percent at 2:10 p.m. on the New York Mercantile Exchange, down from 19.02 percent yesterday. February options volatility fell to 17.95 percent from 18.81 percent.

West Texas Intermediate surged the most in more than two months after TransCanada Corp. said in a regulatory filing it plans to begin operating an oil pipeline from Cushing, Oklahoma, to Port Arthur, Texas, in January. The 700,000-barrel-a-day line will reduce inventories at Cushing, the delivery point for Nymex crude futures.

“The volatility has gone down because people are a little flat-footed in stunned silence waiting to see if this rally is real or just a fluke,” said Phil Flynn, senior market analyst at Price Futures Group in Chicago. “Some are getting out and not putting on new positions.”

West Texas Intermediate for January delivery rose $2.11, or 2.3 percent, to $95.93 a barrel at 2:20 p.m. on the Nymex, the biggest gain since Sept. 18. Prices touched $96.19, the highest intraday level since Nov. 1.

Calls protecting against a 10 percent gain in January futures were 1.5 percentage points above at-the-money options, from a 0.77 percentage point discount yesterday.

January Calls

Flynn said trading was brisk for January $100 calls. Traders also bought at-the-money or just out-of-the-money calls and sold two or three calls at a higher strike price to pay for the purchase.

“You’re a little bullish but you don’t think the market is going to go crazy,” Flynn said.

The most-active options were January $100 calls, which rose 11 cents to 17 cents with 4,139 lots trading as of 2:13 p.m. January $90 puts, the second-most active, declined 23 cents to 9 cents on volume of 3,828. January $98 calls jumped 34 cents to 51 cents on 2,882 lots and January $102 calls were up 4 cents to 6 cents with 2,619 lots traded.

Puts, or bets that prices would fall, accounted for 56 percent of electronic trading volume today.

In yesterday’s session, of the 61,864 lots traded, puts accounted for 57 percent of the volume. February $90 puts fell 35 cents to $1.07 a barrel on 2,922 contracts. January $90 puts declined 24 cents to 32 cents on volume of 2,831 lots.

Open interest in the previous session was highest for June $80 puts, with 28,975 contracts. Next were January $75 puts with 27,261 lots and January $85 puts with 26,104.

The exchange distributes real-time data for electronic trading and releases information the next business day on open-outcry volume, where the bulk of options activity occurs.

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