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This strange event could send crude oil soaring

A huge move for oil could be on tap Monday afternoon, when an unusually high level of activity in September options contracts could set the stage for a vicious rally.

Options on the September crude oil futures contract expire Monday at the 2:30 p.m. ET settlement. And those derivative contracts have been very popular, with many traders using them to bet on more downside for crude.

As of Friday afternoon, more than 23,000 contracts were outstanding on the September 40-strike puts, with several other contracts also seeing elevated positioning.

And this isn't chump change, either. Each contract controls 1,000 barrels of crude. That means that if oil closes just a dime below $40 at 2:30, the holders of those options will make a collective $2.3 million. Otherwise, they'll make nothing.

Meanwhile, at a price of roughly $7.50, the 16,000 contracts outstanding on the 50-strike puts alone are worth $120 million. Throw in the interest in the 85-strike put ($273 million), the 60-put ($133 million) and the 55-put ($129 million), and we're beginning to talk about a billion-dollar event in the crude oil market.

With this much money on the line thanks to unusually elevated bearish bets, the last-minute market vacillations could be earthshaking.

"We're really in uncharted waters—I don't ever remember anything like this," commented Stephen Schork, author of the widely read Schork Report. "I would be surprised if we didn't get some sort of major move at the last minute. I either think we'll hit $39, or rise to $45 or $46. It's a roll of the dice."

Yet some traders think the dice may be loaded, with a surge more likely than a drop.

According to iiTrader's chief market strategist, Bill Baruch, the heavy holdings in bearish options will likely send crude much higher in Monday's session. That's because many of the traders with winning positions on their hands will want to lock in profits without needing to sell back the options they'd bought (which would necessitate losing out on 10 cents per barrel due to the bid/ask spread). Alternately, those traders who do simply exit their positions will sell the options to a market maker, forcing that party to buy crude oil futures to hedge.

"The exiting of those puts will spark volume in the market to the upside," Baruch told CNBC.

So why might oil fall instead? Well, with so much money on the line, some options holders may sell the futures in order to increase the potential value of their holdings. That could lead to outsized selling pressure.

After Monday, Schork strongly expects the crude oil slide to continue. But what will happen that day itself is up in the air.

"We're not trading fundamentals—we're just trading action in the market," Schork said. "This is really just high-stakes gambling."

Correction: An earlier version misstated the overall magnitude of the holdings in September crude oil options.

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