Speculators increase bets that Brent crude will fall to $65 in first quarter

LONDON (Reuters) - The main bet that oil speculators are making for the first few months of next year is that a barrel of Brent crude will fall to $65, according to options market data.

Speculators increased these positions before the OPEC meeting in Vienna this week, as expectations rose that it would not cut production - which turned out to be correct.

Brent crude futures fell by more than $6 a barrel following Thursday's decision, hitting a fresh four-year low of $71.12 a barrel on Friday in the biggest weekly slide in three-and-a-half years. [O/R]

ICE options open interest data, which is only available up to Nov. 26, shows that the open interest in put options at $65 a barrel on the March 2015 contract soared to 15,673 lots from close to zero at the start of November, making it one of the largest expiries of 2015.

A put is an option which gives the holder the right to sell an asset at a particular price, and amounts to a hedge or a bet that prices will fall.

Open interest - the number of future or options contracts investors currently own - in $65 puts for the February, March and April contracts now amounts to 35,323 lots, or the equivalent of 35.32 million barrels of oil, outranking puts at $70 and $80, the two other key strike prices.

Options traders and brokers said there had been a large increase in put spread buying ahead of the OPEC meeting as people looked for downside protection.

"Options became expensive," one trader said, adding that volatility had "exploded" in the immediate run up to the meeting.

Implied volatility, one way to gauge an option's value, hit a three-year high of 36 percent on Thursday, driven by the uncertainty over OPEC's decision. This compares with an average of 18 percent so far this year.

Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said this was up from around 15 percent in the summer: "Implied volatility has been bid up as more people sought protection."

Since OPEC's announcement, implied volatility has eased back to 33 percent.

Looking further ahead, the most open interest for the coming year is in $80 puts on the June contract, with 23,519 lots. This position hit a life-of-contract high above 30,000 lots in late October, having trebled in the space of three weeks.

(Reporting by Claire Milhench; Additional reporting by Amanda Cooper; Editing by Robin Pomeroy)