Oil options trade hits record on price surge

NEW YORK (Reuters) - A violent surge in crude oil markets since the revolt in Libya broke out has driven options trade to a fresh record, the New York Mercantile Exchange said on Thursday, as traders speculate on higher prices and consumers dash to hedge their costs.

The CME Group (CME.O), the parent company of NYMEX, where the vast majority of oil options trade, said volume reached a record 324,655 on Wednesday, well above the previous high of 294,411 for the West Texas Intermediate, or WTI, contract.

Market sources said traders were most frequently betting U.S. crude could spike to $120 barrel by April, a gain of more than 20 percent after prices touched $100 for the first time in 2-1/2 years on Wednesday.

Options are price insurance policies that also give traders and dealers the chance to make huge profits -- and losses -- by gaining the right to trade at prices far away from current levels, for a fraction of the outright price.

Chris Thorpe, a managing partner at Hudson Capital Energy in New York, said traders were betting prices could surge higher toward $150 a barrel within the next four weeks.

"Upside calls have been very popular, with interest in WTI crude around the $125 mark and $150 on Brent crude," Thorpe said.

"Upside calls for April WTI at $120 a barrel are currently trading at $1.20 (a barrel)."

A call option gives the buyer the right but not the obligation to buy crude oil at a given price. For $1,200, a trader could buy the $1.20 call option on 1,000 barrels of WTI, potentially making a huge profit if prices spike above $120.

WTI rose as high as $103.41 on Thursday before dropping back to settle at $97.25, down 85 cents on the day.

Brent crude in London surged to a 2-1/2 year peak of almost $120 a barrel, before dropping by more than $8 after Saudi Arabia pledged more oil to any refinery facing shortages as a result of unrest in Libya. <O/R>

"The story here is all about volatility," one options broker at a major firm in the New York area said.

"Since hindsight is truly 20:20, if you are short volatility right now... well you shouldn't be."

Oil's version of the popular VIX or volatility index has surged higher since Friday. The Chicago Board Options Exchange's Crude Oil Volatility Index .OVX, known as the "Oil VIX," has jumped by 38 percent over just three trading sessions.

Oil producers are looking to lock-in future revenues as Brent crude has rallied by 17 percent since Friday, while consumers fear a return to the highs of 2008, when prices peaked just below $150 a barrel.

(Reporting by David Sheppard; editing by Marguerita Choy)