WTI crude oil fell back yesterday in a much-expected retreat from the $70 level as producer cuts and consumer demand destruction rightfully returned to traders' focus. Medium-term market fundamentals point to slower growth in the global economy, reinforcing the recent bearish pressure on energy markets. The 2-day rally in both equity and commodity markets sparked by the highly anticipated US Fed's 0.5% rate cut was of course short-lived.
Implied volatility remains elevated but downside bargains still exist in the form of cheap put spreads and zero-cost 3-ways. Using Average Price Options (Asians), the WTI December 2008 $50/60 put spread is currently trading around $2.50. That's only $2,500 of maximum risk per 1000bbls of crude oil with a potential payout of $7,500. The potential payout can be raised to $10,000 by selling the December $82 call. This 3-way has zero premium at risk at or below $82 and would provide substantial downside protection if crude were to test the $60 level in the next few weeks.
Singapore, 08:50
Thursday, October 30, 2008
Subscribe to:
Posts (Atom)
Posts
