Sing FO Implied Vols

After a brief respite last week, downward pressure returned to commodity markets yesterday with front-month WTI driving back below the $40 level. Singapore refined products showed a similar pattern. Early in the day April Sing Fuel Oil 180 was offered close to $260 before pushing about one standard deviation lower to trade close to $240 in evening trading. The global economic turmoil continued yesterday with AIG announcing more than $60B in losses in Q408 and further bad news from a purchasing managers’ survey. Global trade has dropped dramatically in the past 4 months, amazingly contracting at a faster rate than during the Great Depression of the early 1930’s.

Traders who are currently long physical bunker can take advantage of the relatively elevated implied volatility to sell upside calls as a hedge. A simple example would be selling 10,000MT of the Sing FO 180 April $300 calls at $9.00 against owning the physical (currently April FO is trading around $242). This short call position acts as a sell-stop, making the option seller short at $309 upon expiration above that level ($300 + $9 premium received). Similarly, if the underlying expires below $300, the option seller receives the full $9 of premium on top of any gains or losses resulting from owning the physical.

Singapore, 09:00