The Impact of Options on the Oil Price

An interesting article in the FT today about potential upward pressure on the Oil price if it surpasses $80 as sellers of Calls need to cover their position with futures.

Options-driven rally likely if oil prices move above $80 | FT, 20 Oct


Tony West said...

Actually, the FT has this slightly, but not completely, wrong.

A concentration of options traded at the same strike tend to act as a magnet rather than a sling, especially near expiry; remember every seller of an option has a buyer and both may wish to hedge. So if there are a lot of options with the same strike above $80 the market will tend to drive through $80 to get near this strike level. The $80 level in itself is not that interesting.

A more interesting indicator is the volatility skew, i.e. is the implied volatility for higher strike, out of the money call options different to lower strike, equivalent out of the money put options. A large skew tends to be much more indicative of a strong move through a strike.

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