Iran risk reverses the "oil narrative" as Brent crude call option volume hits record high on Monday, with traders urgently seeking "protection for short positions."

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The oil market is undergoing a dramatic reversal in sentiment. Concerns over supply disruptions triggered by protests in Iran have prompted traders to buy call options on an unprecedented scale, seeking to hedge against the risk of price surges and completely changing the market’s earlier pessimistic expectations of oversupply at the start of the year.

According to Bloomberg, on Monday, Brent crude oil call option trading volume reached a record single-day high, with over 556,000 contracts changing hands. This record follows a surge in trading last Friday, reflecting the market’s heightened vigilance regarding supply risks from Iran, the fourth-largest oil producer in OPEC.

Implied volatility and call option premiums have both continued the climb that started over the weekend, now rising to the highest levels since June of last year when the U.S. and Israel bombed Iran. This has forced short positions that previously bet on oversupply to close urgently. Since last Wednesday, Brent crude oil futures have risen by more than 6%.

It’s worth noting that the shift in market sentiment has been especially abrupt. At the start of this month, prospects for a recovery in Venezuelan production were still intensifying expectations of a global supply surplus, but now geopolitical risks have become the dominant narrative.

Large Spread Trading Dominates the Market

Monday’s options trading was dominated by large-scale spread trades, which provide relatively inexpensive tools to bet on sudden price spikes. According to preliminary data from ICE Futures Europe, the April $74/$78 and $90/$100 spread contracts each had trading volumes equivalent to 40 million barrels in single trades, which are considered extra-large transactions in the oil options market.

There were also early signs of large call option spread trades before last Friday’s close, including May $74/$78 spread contracts equivalent to 50 million barrels, laying the groundwork for Monday’s explosive trading volume.

These spread strategies allow traders to hedge a range of possible outcomes at lower costs, from military escalations to supply disruptions due to protests by Iranian oil workers.

Option "Skew" Shifts Bullish

The "skew" indicator for second-month Brent crude oil options has turned in favor of call options since mid-last week. This indicator measures the cost difference in hedging price increases versus price decreases. This market condition is relatively rare and usually only appears during periods of geopolitical stress.

Consulting firm Energy Aspects pointed out in a report that in recent weeks, traders’ long gamma exposures had been suppressing price volatility. However, last week saw a significant shift in the options market, with large amounts of call buying putting traders in short gamma positions, removing the dampening effect on volatility.

Geopolitical Uncertainty Continues

Although Tehran claimed on Monday to have quelled the protests, the unrest appears to be ongoing. According to CCTV News, reporters learned on January 10 local time from several informed U.S. officials that President Trump has recently been briefed on military strike options against Iran and is seriously considering whether to launch an attack.

With the U.S. response still uncertain, options provide traders with flexible hedging tools to handle a variety of possible scenarios, from military escalation to supply disruption. This market dynamic highlights how oil traders are swiftly shifting from a bearish stance at the start of the year to a defensive posture amid rapidly changing geopolitical risks.

Risk Warning and DisclaimerThe market involves risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any specific user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investment based on this article is at your own risk.```