Options on Light Sweet Crude Oil Futures rank among the more obscure (and illiquid) instruments you can actually trade. Derivative^2's aren't exactly the sort of investment you would expect amateurs to trade (or even recognize), in fact. Actually, it's hard for even pros to find. (Try pulling it up on your Bloomberg if you don't already know the symbol). Why then has (have) someone(s) been accumulating November $100 calls (which expire in just over 30 days) in quite some size? Just a quick look at even incomplete volume data easily shows 70,000 calls changing hands over the last 30 days, half of them in the last two weeks and 12,595 on Wednesday. For comparison, calls for the same strike price in last month's series had 1/10th the volume in the same period and about 1/10th the open interest 30 days before expiration. Since oil was around $10/barrel cheaper at that point we looked at $90 calls too. Those showed about 1/5th the open interest 30 days before expiration.
Given the effect of time decay (theta) on the options, one wonders what buyers here are thinking. $100 WTI crude in 30 days with withering time-decay over the last week or so of that? The volume has been such to throw implied volatilities up to 120-150% on occasion, despite the fact that implied volatilities for December and thereafter seem to be sitting patiently around 40-50%. Then again, with such an illiquid option series, implied volatilities aren't hard to toss around from one extreme to another. Oddly, I haven't seen many puts change hands the last few days since I've been watching the issue. Nor has there been much activity in the later expirations. That makes this a pretty specific bet timing wise.
Goldman's October 13th price target for 3m WTI Crude is $85.00. Their 12m target is $94.00. "Smart money" (does Goldman count?) doesn't seem to have $100 aspirations for crude in the next few weeks (or the next 12 months). Does someone know something? Is someone betting on a crisis in the coming weeks? Is someone betting on a hike in Goldman's price target? An Isreali strike on Iran? Perhaps someone is hedging a rather large position elsewhere? Perhaps field production went down somewhere, or some other midstream transport issue has a producer short for November delivery- making the risk of a big price spike worth throwing a few million at overpriced calls on the verge of serious theta? But why not use plain futures then? Maybe we are seeing the unwind of a large short position in these instruments (dangerous as shorting calls like that would be). Or perhaps someone is just selling a bunch of overpriced volatility and hedging themselves elsewhere (which fails to explain the buyer, actually).
We have no idea, but it is wonderfully fun to speculate.
UPDATE: Reader "Mark," who apparently has noticed the activity, writes in to add this color:
Volatility has been crushed the past 2 days. The Z9 straddle has gone from $8.40 early yesterday to $7.50 now yet the bid in the Z9 100c persists. ATM vol in Z9 is 40.50%, 100c bid is 48.50%. Another 6k traded yesterday, bringing OI close to 80k.
No locals are doing conversions to collect interest (the fees alone for clearing all those options would way more than wipe out collecting interest at .5% for 20 days on $22 in premium). It is clearly someone buy-opening as OI is going higher and higher, curiously we haven't seen the buyer today even though he'd be able to buy a cheaper level than anytime this week.