All Eyes on Opec

Oil markets traded within a relatively tight band yesterday as all eyes are on Opec's emergency meeting today. Traders and analysts are almost unanimously predicting the cartel will announce a further production cut; most estimate between 1-1.5m barrels per day while many expect the cut to be closer to the 2m barrel level. Opec has a second meeting planned for December where further cuts can be made, once the market has had time to absorb any cuts announced today. Regardless of the announcement, volatility will certainly continue in the near-term, thus option protection strategies are the most sensible.

Traders and hedgers have been entering the market within the past week to buy downside protection in the form of cheap puts. While the value of these options has increased substantially, cheap protection strategies still abound. The November through December $65/50 put spread strip is currently trading around $3.00 using Average Price Options. That's $3,000 of maximum loss potential for $12,000 of protection per month below $65. This strategy helps the hedger avoid paying a large premium for downside protection while still locking in protection to the $50 level.

Singapore, 08:15