Zowie—Somebody Made an Absolute Killing by Shorting Oil

Photographer: Phil Ashley/Getty Images

How much money could you have made by correctly betting that oil prices would plummet? The answer will blow your mind. Try an annualized rate of 2.5 billion percent.

Here’s the math: The price on Nymex of a January 2015 put option on light, sweet crude oil with a strike price of $70—giving the buyer the right, but not the obligation, to sell oil at $70 a barrel for delivery in January—sold for 1¢ in mid-July. Today, Dec. 12, the price was $12.34. That’s a five-month return of 123,000 percent. If your money kept growing at that same rate for a full year, the annual return would be 2.6 billion percent.

This chart shows just how crazy the price movement has been.

Keep in mind a few caveats:
 
1) There’s an excellent chance that whoever bought the option in July sold it well before the expiration date, locking in a gain but missing out on some of the upside.
 
2) The option buyer might have been an oil company or someone else trying to hedge exposure to a falling oil price. So gains on the option would have been offset by losses on the oil itself.
 
3) While the five-month return is accurate, the annual figure is pure fantasy. Returns this huge are rare, and the chance that your money would continue to grow at the same pace for seven more months borders on zero.

Still, the calculation gives a flavor of how much money could be made by betting against oil. “When you see a massive move like this, if somebody went long a whole bunch of puts, you could buy very, very cheap, and that’s your home run,” says Tariq Zahir, a fund manager at Tyche Capital Advisors in Laurel Hollow, N.Y. To make the big bucks, he says, “You have to have this kind of move, which for lack of a better word is historic.”

The figures above are for the West Texas Intermediate oil contract traded on the New York Mercantile Exchange, a unit of the CME Group. In the example, the price fluctuated between 1¢ and 3¢ the whole month of July. The writer of the option—the person on the other side of the transaction—agreed to buy the oil at that price. The option writer took what seemed a tiny risk at the time to collect one penny per barrel. Now that oil is below $60 a barrel, the premium received doesn’t look like free money after all. The option writer is on the hook to pay $70 for a barrel that will probably cost less than $60 or find someone else to take the contract off his or her hands.

Although prices are quoted in cents per barrel, each contract covers 1,000 barrels. So when the option is priced at 1¢, the cost of the contract covering 1,000 barrels is $10.

The math is similar for Brent crude, the international benchmark, for which options are traded on the Intercontinental Exchange ICE Futures Europe exchange. The price of a January 2015 put option on Brent crude oil with a strike price of $80 rose from 10¢ on Sept. 10 to $16.32 on Dec. 11, the last day of trading. That’s a three-month return of 16,220 percent. If your money kept growing at that same rate for a full year, the annual return would be 70,938,273,938 percent.

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