Commodity and equity markets rallied yesterday on the back of a new stimulus announcement from China and fresh Obama infrastructure hopes in the U.S. Opec also ratcheted up the tough-talk with an announcement of a possible surprise cut in production of 2 million barrels at the cartel's upcoming meeting. Crude traders had called for a strong push lower to $40 in WTI and last week's move may have been it. With many analysts still looking for $30-35, the current level beckons consumer hedgers to lock in 4-year lows across the futures curve.
Using Asian-style options, the WTI 2Q09 $65/85 call spread strip is currently trading around $3,000 per 1000 barrels of exposure per month. With very limited risk, this consumer hedge has $51,000 of upside protection and can be combined with the sale of the $40 put in the same tenor to make the entire structure costless. With the 2Q09 swap currently trading around $52, the zero-cost strategy has about $12 of downside space.
Singapore, 08:00
Monday, December 8, 2008
Thursday, December 4, 2008
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
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
Tuesday, December 2, 2008
Crude Pushes Lower
WTI crude oil fell below $47 in volatile trading yesterday, marking a drop of more than $100 in less than five months. Short-term producer hedgers have benefited from cheap put purchases over this period, as rising inventories and refining capacity combine with relentless consumer demand declines and a global deleveraging of risk. Despite the steep drop of recent months, many traders see no reason for a near-term reversal of the trend.
Many hedgers have been taking advantage of short-term downside bargains combined with a longer-term bullish perspective. Using WTI Asian options, the Q109 $30 put strip can be owned for only about $1,000 of total risk per month per 1000 barrels. This position can be combined with the purchase of the 2H09 $90 call strip for about $1,500 of total risk per month per 1000 barrels. This "calendar strangle strip" position effectively captures downside risk in the near-term while providing potential upside consumer protection for the remainder of 2009.
Singapore, 09:00
Many hedgers have been taking advantage of short-term downside bargains combined with a longer-term bullish perspective. Using WTI Asian options, the Q109 $30 put strip can be owned for only about $1,000 of total risk per month per 1000 barrels. This position can be combined with the purchase of the 2H09 $90 call strip for about $1,500 of total risk per month per 1000 barrels. This "calendar strangle strip" position effectively captures downside risk in the near-term while providing potential upside consumer protection for the remainder of 2009.
Singapore, 09:00
Monday, December 1, 2008
WTI Below $50 as a Result of Opec's Failure to Cut
Front-month WTI crude pushed below $50 yesterday, giving back much of the gains from late last week. The drop in prices was seen by many as a reaction to Opec's lack of further production cuts at the sideline meeting in Cairo over the weekend. Approximately $5 of premium had been built-in to the market as a precaution by traders against a surprise cut by the cartel; it was this premium that began bleeding out during Asian trading and accelerated as the western markets opened.
Implied volatility increased yesterday as uncertainty returned to the market. Traders are now focused on how low crude can push in the next three to six months. Strong buying has been seen in both the $30 and $40 put range through the first half of 2009. Using Asian-style options, the WTI 1H09 $30 put strip is currently offered at a very cheap $0.70. That's $700 of total premium at risk per month- crude need not trade below $30 for these options to return protection/profits- any sharp drop towards the $40 level in the next few months should result in an increase in value for these puts.
Singapore, 08:00
Implied volatility increased yesterday as uncertainty returned to the market. Traders are now focused on how low crude can push in the next three to six months. Strong buying has been seen in both the $30 and $40 put range through the first half of 2009. Using Asian-style options, the WTI 1H09 $30 put strip is currently offered at a very cheap $0.70. That's $700 of total premium at risk per month- crude need not trade below $30 for these options to return protection/profits- any sharp drop towards the $40 level in the next few months should result in an increase in value for these puts.
Singapore, 08:00
Sunday, November 30, 2008
Saudi Arabia Targets $75
Oil markets remained pensive on Friday ahead of Opec's sideline meeting in Cairo. As expected, the cartel did not announce further production cuts, however the markets may be stirred during Asian trading Monday morning as a result of Saudi Arabia's price targeting. In a rare step outside of typical form, Saudi Oil Minister Ali al-Naimi targetted $75 as a fair and reasonable price level. In late-day trading in NY, bargain hunters bid up the June 2009 $75 calls.
Similar consumer strategies have been targeted in WTI for mid to late 2009 when global crude demand may begin to return. Using Asian options, the July through December 2009 (2H09) $80/100 call spread strip is offered at about $2.70 ($2,700 of total premium at risk per month with a maximum payout of $17,300 per month). The call spread strip can be purchased for Zero Cost by selling the $48 put in the same tenor. With the 2H09 swap strip trading above $64.00, downside risk on this Zero-Cost 3-Way does not begin for more than $16.00.
Singapore, 16:00
Similar consumer strategies have been targeted in WTI for mid to late 2009 when global crude demand may begin to return. Using Asian options, the July through December 2009 (2H09) $80/100 call spread strip is offered at about $2.70 ($2,700 of total premium at risk per month with a maximum payout of $17,300 per month). The call spread strip can be purchased for Zero Cost by selling the $48 put in the same tenor. With the 2H09 swap strip trading above $64.00, downside risk on this Zero-Cost 3-Way does not begin for more than $16.00.
Singapore, 16:00
Wednesday, November 26, 2008
Bounce off $50 Highlights Consumer Protection Strategies
Added stimulus to the ailing Chinese economy provided the backdrop for a rise in commodity prices as crude oil once again bounced off the $50 level. Current demand destruction was highlighted by the US stock data showing large inventory increases for both crude oil and unleaded gasoline. These numbers emphasize the plight of Opec; the cartel has struggled to cut production at a rate which would reduce stocks in competition with plummeting demand. The group continues to tread one step behind the market, although recent gains in equities combined with the crude market falling almost $100 in 4 months appear to have placed a temporary floor under the oil price.
Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).
Singapore, 06:30
Yesterday's rally from $50 resulted in lower implied volatility and therefore cheaper option premiums. Consumer hedges have come into the spotlight again with traders looking at the WTI Asian-style Q109 $65/75 call spread strip, currently trading around $1.90 ($1,900 of total risk against $8,100 of profit potential per month). For the same risk exposure but with a larger band of upside protection, traders have also been quoting the WTI Asian-style Q109 $70/90 call spread strip, currently trading around $1.90 ($1,900 of total risk against $18,100 of profit potential per month).
Singapore, 06:30
Tuesday, November 25, 2008
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
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
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