Post OPEC decision, traders rush to dump options positions

Traders Chicago Board Options Exchange (CBOE)
Getty Images

Crude oil options sank at the fastest pace in years on Friday after OPEC decided to keep pumping crude at record rates, prompting traders to unwind bets they had placed ahead of the group's meeting to protect against possible wild fluctuations in futures prices.

The CBOE crude oil volatility index, a measure of options prices, plunged as much as 13 percent to 33 points, the largest one-day drop since 2011. That's down from a four-year high of 64 in February.

OPEC's decision, effectively reinforcing the bearish outlook for prices amid a global glut of crude, restored some certainty to the jittery market. Prices whipsawed earlier in the week ahead of the much-anticipated news.

Futures prices seesawed after the decision, with Brent hitting seven-week lows before recovering to settle up about 2 percent.

Read MoreOPEC to keep production levels: Saudi oil minister

Bracing for potential unexpected news, nervous traders waited for official confirmation in the morning before shedding their protective bets.

"I think the volatility story today was people who had geared up for a surprise, and sold it," said Phil Thompson, vice president at Mobius Risk Group in Houston.

At the previous OPEC meeting in November, prices went into a tailspin, plunging more than 10 percent the day after the cartel announced its plan to keep output unchanged.

On Friday, OPEC affirmed its output target of 30 million barrels per day, ignoring calls from some members to cut supply and support prices ahead of additional exports from Iran.

Ahead of the meeting, some positioned to bet that market volatility would decline, said Michael Cohen, head of energy commodities research at Barclays.

OPEC maintains oil output
OPEC maintains oil output   

Some traders had bought options structures known as "straddles" in case OPEC had surprised with a decision to cut or raise output, according to Thompson and others familiar with trading strategies.

A straddle involves buying both a call and a put at the same strike price and expiration date and traders use it to bet on changes in market volatility regardless of price direction. As a result, that increased volatility, which spiked on Wednesday ahead of the meeting.

On Friday, the most active options were July $55 puts expiring later this month. Of those contracts, almost 14,400 changed hands on the day, equivalent to 14.4 million barrels of crude.

These puts allow the holders to make a profit if prices drop below $55.

Thompson said oil producers are selling optionality for years that are further in the future, like 2016 and 2017, while enhancing options for the current year.