Author：Currency Explorer

Traders are flocking to the options market as supply disruptions caused by the conflict in Iran have led to a surge in prices for crude oil and other commodities.

As manufacturers, airlines, and utility companies engage in unprecedented hedging,Implied volatility in crude oil has surged to extremely rare levels, while implied volatility in European natural gas has hit a new high since 2023. The CME Group stated that its energy sector recorded a record single-day volume of over 8 million contracts last Friday.

“This is clearly one of the biggest volatile events in the last 20 years,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. “You have to scrutinize everything, including those spot market indicators that you can’t see on the trading screen. You have to be on your toes right now.”

Crude oil has been at the center of this storm.The Strait of Hormuz, which typically carries about one-fifth of global freight, is currently experiencing a near standstill in shipping. WTI crude oil surged 12% on Friday, marking its largest weekly gain ever at 35%.

Oil prices surged past $100 on Monday. The UAE and Kuwait have begun reducing crude oil production, exacerbating the supply crisis. WTI options volatility jumped to its highest level since the COVID-19 pandemic began last Friday. Specifically, the skewness indicator, which measures the difference between call and put option premiums, reached its strongest bullish level since Bloomberg began compiling data in 2015.

Last Friday, call option spread contracts with strike prices of $120 to $150 for April were traded, which appears to be rolling over positions to higher levels.

Babin stated, "Volatility is rising faster than open interest. This tells us we are entering a situation where traders are unwilling to take risks."

The extent to which call option buying extends along the term structure has even surpassed levels seen after the US bombing of Iranian nuclear facilities last year.Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said...This suggests that investors believe the risk will not be just a short-lived conflict.

The shipping disruptions have also disrupted liquefied natural gas supplies from the Middle East, dealing a further blow to the European gas market, which is still recovering from the price surge following the 2022 Russia-Ukraine conflict.

The Dutch TTF natural gas market has experienced an extremely sharp reversal.Just days before the conflict erupted, many investors had turned bearish, putting the market on the verge of a rebound.

Therefore, implied volatility has more than quadrupled since the beginning of this year and is currently near its highest point since the summer of 2023.

The disruption to liquefied natural gas (LNG) transport from the Middle East and the resulting price surge have also had a ripple effect on metal and fertilizer producers.

Aluminum prices surged as supply disruptions forced aluminum producers in Bahrain and Qatar to halt shipments.Despite the market's steady upward trend and increasingly bullish trader sentiment, options buying reached unprecedented heights on the eve of the conflict.

As tensions escalated, a trader bought a massive call option spread contract on the London Metal Exchange in late February. Now, with prices soaring, that $40 million bet is in profit territory. Implied volatility for near-month options has far exceeded actual price movements as traders pay increasingly higher premiums to hedge against potentially sharp swings.

The US agricultural market also felt the shockwaves. Options traders placed bets...Due to rising fuel prices and fertilizer supply disruptions, already high corn prices are expected to continue to climb.

Last Thursday, a trader spent over $5 million to buy call option spread contracts with strike prices between $5.50 and $6, locking in protection for 160 million bushels of commodities against a potential 20% surge in September futures prices. Further large trades on Friday pushed call option volume to its highest level since mid-2024.