As oil collapses, some options players bet on a bounce

FILE PHOTO: A 3D printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration

NEW YORK (Reuters) - As U.S. crude prices dropped below $0 for the first time ever on Monday, some options investors were betting on a rebound.

Call options - used for upside participation - accounted for around two-thirds of the 3.5 million options contracts traded Monday on the United States Oil Fund LP, the largest U.S. crude exchange-traded fund.

Among Monday’s biggest individual trades was a purchase of 18,514 July calls for 6 cents each that could be exercised, or redeemed for USO shares, should the fund rise above $8. The United States Oil Fund ended Monday’s session 10.9% lower at $3.75.

The bullish wagers were likely driven by investors betting that oil could mount at least a medium-term bounce after a rout that has seen prices crushed on concerns of oversupply, analysts said.

“There’s a lot of interest because the levels that have been reached (in oil) are extremely extended,” said Arnim Holzer, macro and correlation defense strategist at EAB Investment Group, of Monday’s call activity in USO.

Although USO shares fell sharply on Monday, they did not tumble nearly as much as expiring May futures for U.S. crude, which plummeted 306% to -$37.63 a barrel. The fund had rolled its positions earlier this month into June contracts for West Texas Intermediate crude, which fell 18% to $20.43 a barrel.

Still, implied volatility for puts, which are used for downside protection, far outstripped that for calls - an indication that many investors are wary of further declines to come should concerns regarding oversupply and scarcity of storage in oil markets persist.

On Monday, 30-day implied volatility skew for USO jumped nearly seven points to 29.2%, near its highest level over the past year, according to Trade Alert. Skew measures the demand for puts relative to calls. The jump in skew reflects a rising premium for puts despite the brisk volume in calls.

“As cheap as things have gotten on an absolute basis, there are some concerns that next month could be similar to this month,” Holzer said.

Reporting by April Joyner; Editing by Ira Iosebashvili and Richard Pullin