New Year Rally keeps volatility high

Following late 2008 inventory reduction strategies and a general bearish sentiment, it is not hard to believe a correction or bounce was due. The Israeli confrontations with Hamas in Gaza were more than enough news to help the market sustain a rally. Now we are seeing plenty of upside hedges coming in, taking advantage of put skew (calls cheaper in comparison, and selling puts to finance appears a good tradeoff).

Volatility remains high by historic standards in the low 90s (%). The high level of volatility still provides a good opportunity to those who can use a 3 way strategy (selling 1 option net) to achieve low cost hedges. One such idea is to buy a call spread and sell a put such as the WTI Q1 62-72 call spread versus the $40 put for zero cost. The current swap reference for Q1 is $52. This is more of an insurance trade but accepts a $40 floor, which is near the marginal cost for many producers outside the Middle East (such as Canada).

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