Post by
robnhood on Jan 06, 2015 8:10am
Here’s how bearish some traders are getting on oil these da
By
WILLIAM
WATTS
REPORTER
NEW YORK (MarketWatch) — Here’s how bearish some traders are getting on oil these days.
Even before Nymex WTI crude futures on Monday dipped below $50 a barrel in the latest stage of the crude rout, Stephen Schork, editor of the widely followed Schork Report, took note of trading in well out-of-the-money put options (puts give you the right, but not the obligation, to sell the underlying futures contract at a specific strike price).
See: U.S. stocks nosedive as oil prices tumble.
Unsurprisingly, open interest (the number of open contracts) in $50 strike-price puts on the February WTI futures contract CLG5, -1.66% had risen to 22,537 as of Friday’s close from 193 contracts at the beginning of December. Open interest on $45 puts rose from 8 to 36,113, while open interest in $40 puts rose from 1 to 9,864.
Here’s where it gets interesting: Open interest on $30 puts on the March futures contract CLH5, -1.66% rose to 2,127 from 34, while $30 puts on the June contract CLM5, -1.52% rose from 35 to 51,252. In addition, there has even been some light trading in June $20 puts, with open interest at 176 as of Friday’s close.
“In other words, bets on sub-$30 crude oil in June are now 1.7 times greater than physical inventory at the Nymex terminal complex in Cushing,” Schork said in a note, referring to the Oklahoma delivery point for WTI oil.
Of course, a trader can make money on a put even if the price of the underlying contract doesn’t fall below the strike price. The value of the option can rise as the price of the commodity declines. But the pickup in interest in far out-of-the money calls is noteworthy for what it says about market psychology.
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Is it a sign that market sentiment has moved to an extreme, setting the stage for a rebound?
The economics of the oil market are effectively “broken” and that’s left “psychology” to drive price action, Schork said. Even though the market is oversold according to technical measures, that’s been the case for the past three months, he said.
“We could get a rebound to $70, but we could see $30 before we see $70, so why do you risk $20 to win $20,” he said. “So no picking the bottom here.”