Oil Options Are Pricing In A Smaller Risk Of Middle East Escalation
(Bloomberg) -- Oil options are tentatively pricing in a smaller risk of escalation in the Middle East as a result of the Gaza war.
A rare so-called call skew emerged — and then became extreme — in oil options trading in the days after the war began. It meant traders were willing to pay more for protection against prices spiking than for insurance against a slump.
The big concern was that Iran, a major oil producer in the Persian Gulf, would be drawn in more directly, causing the conflict to spiral. So far that hasn't happened.
That call skew remains — meaning traders are still fearful that something will cause the conflict to spread beyond Israel and its immediate neighbors. But it has been steadily diminishing, even after Israel began an incursion into Gaza.
On Tuesday, the gauge fell to the least bullish since it flipped from a bearish leaning on Oct. 13. While calls were still about 1 percentage point more expensive than puts, that marked a sharp reversal from the days after the start of the war when at one point they were as much as 5.6 percentage points higher.
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