Increases in margin requirements in the oil, agriculture and metals markets over the past five years have resulted in a significant shift in hedging practices from futures to options, said Will Acworth, FIA’s global head of market intelligence, in his latest Trends in ETD Trading webinar.
Open interest data from commodity exchanges in the US, for example, shows that options as a ratio of the total amount of contracts has grown from under 30% in 2019 to over 40% in 2025. Open interest measures the number of contracts outstanding at exchanges such as the Chicago Board of Trade and ICE Futures US.
“I first got an idea of this trend several years ago when we had some guests from Morgan Stanley on the webinar, and they pointed out that they had seen this change in customer behaviour, with more use of options on futures instead of futures,” said Acworth.
One factor driving this shift is the funding requirements for hedging strategies. Commodity market participants have experienced several episodes of extreme volatility in recent years, which has resulted in higher margin requirements for commodity futures to cover the swings in value.
For oil producers and other commercial market participants, a sudden spike in the margin requirements on their hedges can create a cash flow problem because they need to post collateral almost immediately to cover those requirements. One way around that is to use an options strategy .
“We have seen higher and more volatile margin requirements for the last several years starting with the pandemic in 2020, extreme weather volatility in certain parts of the US, most notably the Winter Storm Uri in 2021, and then Russia's invasion of Ukraine,” said Acworth.
“This affects futures end-users more than options end-users because those margin requirements create funding issues for producers who are trying to hedge risk in their production or in their input costs. With options, if you're just paying the premium on an option, it provides more certainty than futures in terms of the cost of protection.”
Another smaller but significant factor concerns changes in the financial condition of producers, which has led to a reduction in hedging, Acworth added.
“If you look at the quarterly financial reports from the publicly traded oil and gas producers in the US, you can see that there is greater financial discipline and less use of bank financing to leverage their operations, meaning fewer requirements to hedge their downside risk. Instead, the hedging strategy becomes optional, and we're seeing a reduction in hedging in general, and when they are hedging, it tends to be with options-based structures, such as collars,” he said.
Watch a recording of the webinar, which includes a first-half-of-the-year review of volume and open interest on derivatives exchanges worldwide. Other topics of discussion include the sharp decline in India's options market, the continued growth of interest rate futures and options in Europe and the US, and the increasing competition among exchanges in the energy and power markets.
See also: US energy producers reduce hedging to capture upside from higher prices | FIA
