Oil derivatives signal traders see Middle East shock as short-lived

Core Viewpoint - The latest Middle East conflict is perceived by traders as a temporary shock, leading to strategies that profit from a retreat in oil prices after an initial spike [1] Oil Market Dynamics - Oil options and futures indicate that traders are betting on a logistical crisis rather than a structural one, as evidenced by the significant increase in implied volatility for short-term Brent contracts [1] - The Brent futures curve shows a steep backwardation, with the spread between the front-month and six-month contracts widening to about $10, the highest since the Russia-Ukraine war in 2022, indicating tight near-term supply [1] Trading Behavior - The put-to-call ratio for West Texas Intermediate options dropped to 0.35, reflecting heavy bullish call buying, before rebounding to 0.56, indicating a shift in market sentiment towards downside protection [1] - Dealers are short a significant amount of deep out-of-the-money calls, creating a negative gamma profile in crude, contrasting with typical environments where dealers are long gamma [1] Open Interest Trends - Brent options open interest fell sharply from around 388,000 contracts on February 18 to approximately 73,000 by February 27, before surging to over 700,000 contracts on March 2, suggesting a significant unwinding of positions [1] - More than 40% of futures open interest is concentrated in April through July expiries, with thinner positioning further out the curve, indicating a focus on short-term trading strategies [1]