Options Traders Bet on Return of $100 Oil

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Traders have alighted on what some believe to be a one-way bet in the world’s most important commodity market: oil prices going to $100 a barrel.

They have scooped up call options tied to Brent and West Texas Intermediate crude-oil prices reaching $100 by the end of next year. Oil prices haven’t topped that milestone since 2014, when a gush of U.S. crude depressed energy markets.

Owners of $100 options—now the most widely owned WTI call contracts on the New York Mercantile Exchange—are making a leveraged bet that oil prices will hurtle higher after already surging more than 40% this year. The roaring rally, goosed by thawing coronavirus restrictions, has lifted WTI prices to their highest level since 2018 at almost $70 a barrel and average U.S. gasoline prices above $3 a gallon, according to GasBuddy.

The popularity of $100 options is another example of traders converging on seemingly outlandish wagers they consider to be almost guaranteed ways of making money. Analysts say oil is unlikely to zip to $100 any time soon because the world economy is still recovering from the shock of Covid-19 and major producers are lifting output in response to resurgent demand.

“Everyone’s been looking at it,” Adam Webb, chief investment officer of trading firm Blue Creek Capital Management LLC, said of $100 call options for oil delivered in December 2022. “It’s a no-brainer.”

Mr. Webb thinks the rebound in the U.S. economy will help to catapult WTI prices toward $100 a barrel. The fund has sold put options to fund the purchase of $100 calls, which he judges to be unsustainably cheap.

The flurry of activity in $100-oil options holds parallels with speculative wagers that have proliferated in other corners of financial markets. In January, traders piled into options on unprofitable companies such as GameStop Corp. and AMC Entertainment Holdings Inc. They figured doing so would boost share prices, inflict losses on bearish investors and prompt them to buy back shares they had sold short. The self-fueling dynamic drove prices even higher in a trading frenzy that reignited in early June.

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Betting on an imminent return to $100 for oil is striking just over a year after the pandemic slammed energy demand and U.S. crude futures tumbled below zero. Products derived from crude fuel cars, power electricity generators and are the building blocks of plastics, making oil a vital component of the world economy. Spikes in crude markets are to some extent self-correcting because higher prices curtail demand and encourage greater production.

Barring an influx of investors into commodity markets or a slump in the dollar, oil demand would need to rise well above pre-pandemic levels in the fourth quarter for prices to hit $100 this year, according to JPMorgan Chase analyst Natasha Kaneva. She says that is all but impossible. Other grounds for caution include an increase in Iranian crude exports in the event of a nuclear deal with the U.S.

That hasn’t deterred traders from building a big position in $100 call options. The contracts give their owner the right to buy crude futures at $100 a barrel. They pay out if prices rise above that strike price before expiration.

December 2022 contracts with a strike of $100 are by far the most widely owned WTI call option on the New York Mercantile Exchange. There are more than 60,000 outstanding, according to options-data provider QuikStrike, covering more than 60 million barrels of crude.

Some traders are betting $100 oil could happen this year: $100 December 2021 calls are tied to 15.9 million barrels of WTI. In London’s Brent market, $100 contracts for December 2021 covered more than 32 million barrels last week, up from none at the end of last year, according to Intercontinental Exchange.

Even some of those buying the options don’t expect oil prices to hit $100 but think they will profit regardless. Traders say the contracts, dubbed lottery tickets, will likely appreciate if oil prices keep rising or if participants expect crude markets to grow more volatile.

Buyers are betting on higher volatility more than they are placing a wager on higher oil prices, said Robert Yawger, director of energy futures at Mizuho Securities USA. Volatility and options are intrinsically linked, so all else being equal, that would boost the price of the contracts.

Mr. Yawger doesn’t think oil will get close to $100 a barrel, noting that the futures market pegs WTI prices at about $61 a barrel for December 2022. He said owners of $100 calls will benefit anyway because expected volatility is low and likely to rise. Sellers are “basically giving [volatility] away” at current prices, he said.

A trader who bought $100 calls for December 2022 at the end of last year would already be sitting on paper gains. The contracts traded at 66 U.S. cents Friday, QuikStrike data show, up from 27 cents on Dec. 31.

Traders say they are still relatively cheap because demand from producers seeking protection against falling prices means oil puts are typically more expensive than calls. The $100 call trade isn’t risk free, however.

Jean-Louis Le Mee, chief executive of Westbeck Capital Management LLP, forecasts crude prices will surge to record highs in 2023 but is surprised at how many $100 Brent call options for 2021 are outstanding. The hedge fund steers clear of such bullish contracts, preferring to buy options that Mr. Le Mee thinks will settle in the money. Even if volatility rises, $100 contracts will lose value if it happens too close to expiration, he said.

Instead, Westbeck has booked profits by selling $65 Brent-crude calls for December 2022 that it bought last year and used the proceeds to buy $80 contracts for December 2023.

Write to Joe Wallace at Joe.Wallace@wsj.com

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