Thursday, October 30, 2008

Oil Options at $50 Soar

Oil Options at $50 Soar After OPEC Cut Fails to Support Prices

By Alexander Kwiatkowski

Oct. 24 (Bloomberg) -- Oil options contracts to sell crude at $50 by December almost tripled today after an OPEC decision to slash production failed to allay concerns that the global economic slump is hurting demand.

The cost of the $50 December 2008 put option, which gives the holder the right to sell oil futures at $50 a barrel, rose as much as 142 percent to $1.50 on the New York Mercantile Exchange, compared with 62 cents yesterday, according to exchange data.

``It certainly seems to me that we could get down to $50 a barrel,'' Adam Sieminski, Deutsche Bank's chief energy economist, said in a Bloomberg Radio interview today. ``You could look at the OPEC cut as a sign of weakness, not strength.''

The cost of the option jumped on speculation that an output cut announced today by the Organization of Petroleum Exporting Countries, which supplies about 40 percent of the world's oil, won't be enough to stem plunging prices.

OPEC decided at its Vienna headquarters today to lower the production quota for 11 of its members by 1.5 million barrels a day, to 27.308 million barrels a day, starting from Nov. 1.

Crude oil futures for December delivery dropped as much as $5.19, or 7.7 percent, to $62.65 a barrel in electronic trading on Nymex, and traded at $64.51 a barrel at 9:59 a.m. local time.

The price of crude has tumbled 56 percent since rising to a record $147.27 a barrel in New York on July 11.

Speculators can profit from the rising value of put options by selling the options themselves back into the market. Alternatively, if crude futures fall below the $50-a-barrel ``strike'' price, holders of the put options can exercise their right to sell futures at $50, and then buy the futures back for less in the market, making a profit.

The Nymex options contracts are for 1,000 barrels each, as are the underlying futures contracts. On Oct. 3, the $50 December put option was valued at 1 cent a barrel, or $10 for the 1,000-barrel lot.

To contact the reporter on this story: Alexander Kwiatkowski in London at

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