FxWirePro: Brent and WTI open interest in OTM strikes and VIX tip-off after Christmas rallies beyond $60/brl

The above charts evidence a summary of the distribution of option open interest (OI) observed across the major strikes and expiries for crude oil (WTI and Brent) at LME.

These open interest numbers are the number of outstanding contracts held by the longs or the shorts and not the total of the both.

Generally, the volumes and open interests will be small at the early stages of futures contract life and expands as it reaches the maturity period and again drop during close to expiration stage.

One can observe the trading interest in WTI crude prices above $45-$50 a barrel towards strikes of $60/ a barrel which would mean that speculative as well as more hedging activities are undertaken at these levels anticipating forward prices during early H1 2017.

Since the beginning of 2016 uncertainty has been a key driver of commodity prices and has played a major role in shaping the risk profile and sentiment outlook for many commodity market participants.

Gold had its best start to the year in more than 25 years with a +24.6% move higher in the first six months of the year on renewed safe-haven appeal — and both macroeconomic and fundamental uncertainty in the oil market has driven it through six bull and bear markets this year alone.

With Brexit implications still largely unknown, ongoing shifts in the US rate hike probability outlook and the US election less than three months away, we expect uncertainty to continue.

The CFTC (U.S. Commodity Futures Trading Commission) released its weekly Commitment of Traders report. It reported that US crude oil futures contracts’ open interest is close to record highs, one can keep a track of this data.

If price increases and open interest increases, then there is the strength behind the price move higher.

If price decreases and open interest increases, then there is the strength behind the price move lower.

One can also understand the consolidating pattern in spot WTI prices are moving in sync with these outstanding positions in OTC contracts.

The last month’s strong bullish green candle occurred is the evidence of consolidating prices amid bearish attempts with a sharp increase in open interest, interpreted as a strong bullish signal that price increases might occur in the future.

For the trading purpose, avoid picks with lower volumes and lower open interest.