Renewed Push Lower for Crude Oil

Crude oil prices dropped sharply on Tuesday, reversing much of the gains enjoyed in the 2-day rally surrounding the weekend. The downward move pushed implied volatilities higher as producer hedgers moved to protect their downside. The 10% rally that began late last week enabled those traders that are long physical to buy downside puts (which become cheaper as the market moves higher). The lower implied volatility of the past few days only added to the incentive to lock-in cheap protection.

As the market has now retraced much of the recent gains, a renewed emphasis is on how low this market can push in the short-term. Bargains remain in near-term downside protection: using Asian options, the WTI January $40 puts are trading around $1.00 ($1,000 max exposure for 1000 barrels of protection). WTI crude need not trade below $40 for these puts to be profitable, any near-term movement lower may result in a sharp jump in the premium of this option. Traders can also opt for the January $30/45 put spread, currently trading around $1.10.

Singapore, 08:00