Israel-Iran Tensions Spark 20% Surge in Oil Call Options

The recent escalation in tensions between Israel and Iran has led to a surge in the demand for call options on crude oil, as investors seek to hedge against potential disruptions in global oil supplies. This heightened demand is driven by the fear that the ongoing conflict could escalate further, leading to a significant reduction in oil production or transportation through key routes such as the Strait of Hormuz. The Strait of Hormuz is a critical chokepoint for global oil trade, with approximately 20% of the world's oil supply passing through it daily. Any disruption in this route could have severe implications for global oil markets, leading to a sharp increase in oil prices.

The conflict between Israel and Iran has a long history, with both countries engaging in a series of military and diplomatic confrontations over the years. The recent escalation began with Israel launching a series of airstrikes on Iranian nuclear facilities and military targets, in response to what it described as Iran's aggressive nuclear program and support for regional militias. Iran, in turn, has vowed to retaliate against Israel, raising concerns about the potential for a broader regional conflict.

The geopolitical risks associated with this conflict have led to a significant increase in the demand for call options on crude oil. Investors are buying these options as a hedge against the potential for a sharp increase in oil prices, which could occur if the conflict escalates further. The demand for call options is particularly high for contracts with expiration dates in the near future, as investors anticipate that any disruption in oil supplies could have an immediate impact on prices.

In the past weekend, both sides continued their exchanges, and energy infrastructure was also targeted. Following this, within a few hours after the start of trading on Monday, thousands of August call options with a strike price above 80 dollars per barrel were traded. Additionally, around 2,000 August Brent call options with strike prices of 100 dollars and 101 dollars were also traded. This level of activity is unusual for the Asian trading session, and it is unclear whether these option trades are part of a larger strategy.

Israel began its attacks on Iran last Friday to halt its nuclear program, destroy its military and scientific leadership, and weaken its armed forces. Oil prices surged in response. Concerns about potential supply disruptions caused the Brent oil curve to steepen, a bullish price pattern where earlier contracts are more expensive than later ones. The Brent forward curve widened further on Monday, with active trading in the futures market, including nearly 20,000 contracts traded in the first five minutes.

However, during the Asian session on Monday, the so-called option skew for Brent, which measures overall sentiment in the options market, slightly weakened its bullish bias but remained near its strongest level since early 2022, with implied volatility staying high. Since trading is typically more active during London and New York sessions, these indicators may change later in the day.

“The ongoing exchanges between the two countries could keep geopolitical risk premiums elevated,” said a commodity strategist. If Iran were to block the Strait of Hormuz, although the likelihood is low, it would pose a serious threat to the daily transport of nearly 17 million barrels of oil globally.

The surge in demand for call options on crude oil is a clear indication of the market's concern about the potential for a broader regional conflict. Investors are taking steps to protect themselves against the potential for a sharp increase in oil prices, which could have significant implications for global economic growth and stability. The situation remains fluid, and the market will continue to monitor developments closely as the conflict between Israel and Iran unfolds.