Open Interest for $40 Crude Calls Surge Sixfold

Fear can turn into greed overnight, as is the case with crude today. Both. WTI and Brent are skybound, unhinged from the shackles that constrained it yesterday.

Aside from the Fed, the most important aspect to this market is crude. Cramer seems to have fits over this correlation with the market. He believes stocks should trade up with lower crude: utter horseshit. We’ve seen over the past year there isn’t any ancillary benefits from cheaper crude. People aren’t eating out more or buying more crap from the mall. They are, however, playing more lotto.

Here we are, rip roaring higher today. Very encouraging. There are big buyers for $40 crude contracts, as people are trying to grab delta before the price gets rolling and the options explode in price.

This week has seen a flurry of buying of derivatives that give their holder the right to sell at $30 a barrel as far out as December, suggesting that traders and investors are growing increasingly gloomy about the prospects of price recovery.
But outstripping the increase in holdings of $30 so-called “put” options, is the rise in buy, or “call” options at $40 a barrel, which would suggest that traders believe that by December this year, oil at $40 will look like a bargain.

Data from the InterContinental Exchange (ICE) shows holdings of $40 call options for December this year leapt overnight to the equivalent of 27.92 million barrels of oil, making it the second-largest strike for options maturing that month.

The rout that has stripped 30 percent off the price of oil in the last 13 trading days alone has sent equity markets into a tailspin and gave rise to the now-famous “sell (mostly) everything” note by UK investment bank RBS last week.

“With the current volatility, trying to catch a bottom in crude oil on prompt futures has more than a $3 a barrel risk and a contango roll depreciation, but with Brent December 2016 falling below $35, the cost of buying a Brent December 16 $40.00 call has fallen down to $3.60 a barrel,” Olivier Jakob, an analyst a Swiss-based consultant Petromatrix said.

“The Brent December 2017 $50.00 call is at $4.00 a barrel. Given the apparent signs of production stress at the current price levels we see the value in holding the longer-dated call options in crude oil at relatively low strike levels,” he added.

Reflecting Petromatrix’s point, open interest in December calls at $40 now outstrips that of March puts at $30 by a ratio of nearly three to one, based on the ICE data.

Over the last week, open interest in $30 puts in fact fallen by about 20 percent, while in those December $40 calls, it has grown sixfold.

“It’s been the trend of every melt down to buy upside calls before they get too expensive to get some delta when the market turns,” one said.

Market breadth is still in the mid 70’s, not too impressive. However, the rally in crude is very impressive. My money is on a gorilla raping rally through next week.