Source: Jinshi Data

As producers, airlines, and utility companies engage in unprecedented hedging, the implied volatility of crude oil has soared to an extremely rare level, while the implied volatility of European gas has reached a new high since 2023. The Chicago Mercantile Exchange noted that its energy sector set a record for single-day trading volume of over 8 million contracts last Friday.

“This is clearly one of the largest volatility events in the past 20 years,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Group. “You have to examine everything, including the spot market indicators not visible on trading screens. You must be completely alert now.”

Crude oil has been at the center of this storm. The Strait of Hormuz, which typically carries about one-fifth of global shipping volumes, has nearly come to a standstill in current transport. WTI crude oil surged 12% last Friday, marking a record 35% increase for the largest weekly gain ever.

On Monday, oil prices surged above $100. The UAE and Kuwait have started to reduce crude oil production, exacerbating supply difficulties. The volatility of WTI options jumped to its highest level since the COVID-19 pandemic last Friday. Among these, the skew measure gauging the difference in premiums between call and put options briefly reached the strongest bullish level since Bloomberg began compiling data in 2015.

Last Friday, trades occurred for call option spreads with strike prices of $120 to $150 for April, seemingly extending positions to higher levels.

Babin stated, “The speed of the increase in volatility is outpacing the growth of open interest. This tells us we are entering a situation where traders are unwilling to take risks.”

The extent of call option buying extending along the term structure has even surpassed levels seen after the US bombing of Iran’s nuclear facilities last year. Tanvir Sandhu, Bloomberg Intelligence’s chief global derivatives strategist, indicated that this suggests investors believe the risk will not just be a fleeting conflict.

The shipping disruptions have also affected liquefied natural gas supplies in the Middle East, delivering a new heavy blow to the European gas market, which is still recovering from the price surge following the 2022 Russia-Ukraine conflict.

The Dutch TTF gas market has seen an extremely fierce reversal. Many investors had just turned bearish in the days before the outbreak of this conflict, putting the market in a poised state for a rebound.

As a result, implied volatility has more than quadrupled since the beginning of this year and is currently near the highest point since the summer of 2023.

Disruptions to Middle Eastern LNG transportation and soaring prices have also triggered a chain reaction for metal and fertilizer producers.

Aluminum prices have sharply risen as supply disruptions forced aluminum producers in Bahrain and Qatar to halt shipments. Although the market had been steadily rising, and trader sentiment increasingly bullish, call options hit a new peak just before the conflict erupted.

As tensions escalated, a trader bought a large call option spread contract at the end of February at the London Metal Exchange. Now, with prices soaring, this $40 million bet has moved into profitable territory. Due to traders paying increasingly higher premiums to hedge against potential wild swings, the implied volatility of near-term options has far exceeded actual movements.

The US agricultural market also felt the impact of this shockwave. Options traders are betting that, due to rising fuel prices and fertilizer supply disruptions, already elevated corn prices will continue to break upward.

Last Thursday, a trader spent over $5 million to buy call option spread contracts with strike prices of $5.50 to $6, locking in protection for 160 million bushels of commodities against a possible 20% surge in futures prices this September. Further large transactions last Friday pushed that day's call option volume to the highest level since mid-2024.