Calendar Strategies Highlighted

Front-month WTI pushed below the key $45 level yesterday leaving traders to ponder the next level of resistance for the benchmark contract. Implied volatility increased as a result of the lack of any bounce yesterday. As uncertainty as to where the market will bottom-out continues to rise, option strategies become more popular, thus increasing the implied vol. Also of note is the contango spread between January 2009 and January 2010 which has now widened close to -$14.00 (Jan10 is trading about $14 over Jan09) which may be a direct result of the inability of physical traders, because of a lack of credit, to buy spot physical for storage and hedge by selling back-dated futures in the derivatives market. Similarly, many traders expect crude prices to rebound in late 2009- early 2010; this is also reflected in the wide time spread.

With no bottom in sight for near-dated crude futures, cheap put strategies continue to be a winning play. Using Asian-style options, the WTI 1H09 $30 put strip is still offered at a relatively cheap $1,300 per 1000 barrels. This strategy can be made costless by selling the $87 call strip in the same tenor. An excellent long-term view on the market would be to partner the above strategy with the purchase of the WTI 2H09 $90 call strip for about $2,000 per 1000 barrels. This strategy can also be made costless by selling the $38 put strip in the same tenor.

With the 2H09 calendar swap trading above $56, there is currently about $18 buffer room on the downside. Similarly, with the 1H09 calendar swap trading below $50, there is a buffer of more than $37 on the upside.

Singapore, 08:00