Wild price swings on the US crude oil market have driven a big increase in the use of options as traders seek more sophisticated ways to reduce risk and lock in profits. Open interest in crude oil options traded on the New York Mercantile Exchange surged 20 percent from the start of the year, surpassing 4.73 million contracts.
While open interest in oil futures rose only 3 percent to 1.4 million contracts - marking a big slowdown in growth. "A lot of small speculators have been burned by the gyrations in the futures market," said Rob Kuratowski with optionsXpress in Chicago. "Timing is everything with futures and if your timing is wrong, you're going to get stopped out or hit with margin calls."
US crude oil futures have become more volatile since the beginning of 2008 according to Reuters data. Swings of several percent a day are now common and with oil trading above $100 a barrel, even small moves in percentage terms can trigger margin calls, traders said.
"There's a lot more trade recommendations out there ... and more non-traditional speculators who are looking to cut risk. That's what's pushing up open interest," said Kuratowski.
New trading strategies are also fuelling the rapid growth in options open interest as a more liquid options market allows investors to bet on more detailed trading scenarios. "This is an extension of a long term trend - the options market has been adding market share over the last five years," said Citigroup energy futures analyst Tim Evans.
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