NEW YORK: The decreasing oil prices have made the situation very interesting as some traders have begun to place bets on oil prices slumping to as low as $20 a barrel – underscoring the scale of the crude rout and the murky outlook for the world’s staple industrial commodity.
A few months ago such as scenario would have appeared apocalyptic – even at the peak of the financial crisis spot prices never went below $30 – but the crash has led some investors to buy options on prices falling even further.
The number of contracts that give the right to sell the US crude benchmark at $20 a barrel by June – known as put options – has swelled from almost nothing at the start of the year to 13,129 lots, according to Nymex data, the equivalent of 13m barrels of oil.
These options currently cost just 7 cents, so they are heavily “out-of-the-money” in financial parlance. But even if West Texas Intermediate oil doesn’t fall to the $20 strike price, these options can increase exponentially in value if oil starts dipping closer to this level.
In December the FT reported that some investors were buying options on WTI oil falling to $40 a barrel. At the time that seemed an extreme scenario, but the US benchmark fell to $44.82 today. In December options for June delivery of oil at $40 were worth 17 cents, today they are worth $1.95 – a return of more than 11 times in just two months (see first chart below).
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