London, 5 August 2010

Options have overtaken futures as the main vehicle for speculating on crude oil prices and hedging commercial exposure. Violent price swings, increased contract maturity and the scale of margin calls have made futures too expensive for all but the most deep-pocketed funds and corporations.

Crucially, options also offer more leverage for the growing number of hedge funds and other investors active in the market seeking to enhance their returns. The U.S. Commodity Futures Trading Commission (CFTC) publishes separate commitments of traders reports for futures-only and futures-plus-options positions (deltaadjusting the option positions to convert them into futures equivalents).

Most researchers focus on one or the other. But by subtracting the futures-only open interest from the futuresplus-options report it is possible to back out the( delta adjusted) option positions.

For physically settled NYMEX light sweet crude oil (CL), open interest in both futures and options grew steadily from mid-2003 until mid-2007. But in the last three years interest in the two types of contracts has diverged (Chart 1).

Futures interest tripled to a peak of 1.5 million contracts in mid-2007. Since then interest has tailed off. Open interest fell during H2 2007 and 2008. It picked up slightly during 2009 and H1 2010 but remains below levels prevailing three years earlier.

Futures open interest peaked this year at an average of 1.4 million contracts in May and has since slipped to around 1.25 million contracts in the first three weeks of July.

Increased interest from speculators and passive indexes as well as commercial hedging pushed futures open interest up during the four years from 2003 to 2007. But futuresbased hedging and speculation became too expensive from mid-2007 onwards owing to the large swings in oil prices and the cost of meeting margin calls.

At this point the focus began to shift to options. For option contracts, interest continued to rise in H2 2007 and H1 2008 to peak right at the end of the year (well after oil prices had passed their peak and the global banking and economic crisis had struck).

Interest in options picked up as crude prices became more volatile and futures became too unpredictable for hedgers and investors, and then the delta-adjusted option positions surged as prices collapsed in late 2008 (Chart 2).

The main focus in the market has now switched from futures to options. Options now account for about 50 percent of the total futures and options market, down from a peak of 60-65 percent in 2008, but well up from the 30 percent level that was common earlier in the decade (Chart 3).

Even that may understate the enhanced importance of options because many of the futures contracts are in fact being used to delta-hedge options exposure.

Ends --

By John Kemp, Reuters - for Commodities Now

Download Charts here:

Attachments:

CL-FT-OPT-OI1.pdf	63 Kb
CL-FT-OPT-OI2.pdf	71 Kb
CL-OPT-SHARE.pdf	51 Kb