Both volume and the number of options outstanding on the oil ETF surged this month, and nine out of the 10 most-owned contracts are bearish.
Traders are speculating the slump in oil companies will get worse.
Even after valuations for an index tracking the shares slumped 40 percent, investors are loading up on bearish options. The cost of puts on the SPDR S&P Oil & Gas Exploration & Production ETF jumped to the the highest level in seven years versus calls. The exchange-traded fund tracks companies including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, which are down more than 9 percent from their highs this year.
Oil companies were among those losing the most during the stock selloff, with the commodity entering a bear market as global demand growth slowed and threats to supply in Iraq and Libya?receded.
Options Surge
Both volume and the number of options outstanding on the oil ETF surged this month, and nine out of the 10 most-owned contracts are bearish. Those hedging against a 10 percent decline in the fund cost 10.7 points more than calls betting on a 10 percent gain on Oct. 28, according to three-month implied-volatility data compiled by Bloomberg. That?s the widest spread since September 2007.
Analysts are slashing projections for both oil prices and oil companies? profits. While they estimate earnings at companies tracked by the ETF will jump 32 percent in 2014, those projections have dropped by 9.7 percent this month. That?s not enough to account for the decline in oil, and crude could fall even further, according to Blue Oak Advisors? Berger.
Goldman Sachs Group Inc. cut its oil-price estimate this week, and Barclays Plc lowered it for the second time this month.