• 1 hour Mexico Says OPEC Has Not Approached It For Deal Extension
  • 3 hours New Video Game Targets Oil Infrastructure
  • 4 hours Shell Restarts Bonny Light Exports
  • 6 hours Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 12 hours Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 17 hours British Utility Companies Brace For Major Reforms
  • 21 hours Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 23 hours Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 24 hours Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 1 day OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 1 day London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 1 day Rosneft Signs $400M Deal With Kurdistan
  • 1 day Kinder Morgan Warns About Trans Mountain Delays
  • 1 day India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 2 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 2 days Russia, Saudis Team Up To Boost Fracking Tech
  • 2 days Conflicting News Spurs Doubt On Aramco IPO
  • 2 days Exxon Starts Production At New Refinery In Texas
  • 2 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 3 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 3 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 3 days China To Take 5% Of Rosneft’s Output In New Deal
  • 3 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 3 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 3 days VW Fails To Secure Critical Commodity For EVs
  • 3 days Enbridge Pipeline Expansion Finally Approved
  • 3 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 3 days OPEC Oil Deal Compliance Falls To 86%
  • 4 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 4 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 4 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 4 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 4 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 4 days Aramco Says No Plans To Shelve IPO
  • 7 days Trump Passes Iran Nuclear Deal Back to Congress
  • 7 days Texas Shutters More Coal-Fired Plants
  • 7 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 7 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 7 days Chevron Quits Australian Deepwater Oil Exploration
  • 7 days Europe Braces For End Of Iran Nuclear Deal
Kevin Davitt

Kevin Davitt

Kevin brings his unique experience in derivatives to RCM Asset Management. Following graduation (Marquette University – Evans Scholar 1999) Kevin started working for LETCO Trading…

More Info

Don't be Fooled by Current Market Stability

Don't be Fooled by Current Market Stability

Looking out 2-3 months, with WTI crude in the low $90s, I think we're likely to stay relatively range bound ($80-110), but I also feel we're closer to the low end of range than the top.

I would characterize my sentiment as fairly agnostic with underlying bullish tendencies.

I believe that the festering issues in the Middle East will persist. I think that regardless of who resides at 1600 Pennsylvania Ave there is a greater likelihood of tensions increasing than decreasing (ergo underlying bullish leanings).

I'm of the opinion that the reflationist efforts of Central Bankers from here to Shanghai will continue. The race to debase has no end in sight, which from a textbook standpoint ought to be supportive of things like Energies and Metals. I also believe the unintended consequences or potential collateral damage of constant intervention could also be considerable.

In other words, TAIL RISK EXISTS regardless of how complacent the markets becomes in the short term. Just because realized S&P vol over the past 30 days is close to single digits does not mean that the systemic risks that rattled confidence repeatedly over the past 4 years have disappeared.

(Have you ever tried to keep a beach ball underwater?)

Crude Oil NYMEX Jan 2013 Future

Implied vols in WTI have vacilated between 25% and 35% for most of the past year.

Looking out 60-90 days and considering trading opportunities that reflect my sentiment I would consider the following:

FEB CL (underlying ~$91) options expire on 1/16/2013 or 86 calendar days from today.

SELL the 110 call and SELL the 70 put to collect ~$1.10 ($1,100 less commission). This is a short volatility (short ~34 vol) range bound play that benefits from decay (theoretically) and Crude prices remaining above $70 and below $110. The MOST you can make on any short strangle is what you collect (less frictional costs) and I would NOT recommend holding the position until expiration. In my mind, you should try to take 75% or so of the premium collected out of the position.

This trade has unlimited risk.
At expiration, your break-even levels (excluding commission) would be $111.10 and $68.90.
This trade requires $675 in initial margin, but that can go higher if Crude moves quickly.
It has almost no delta sensitivity as of today.

Alternatively, consider a position with more room to the upside.


SELL the 115 call and SELL the 75 put and collect ~$1.35 ($1,350 less commission). Also short volatility, range bound play where the most you can make is what you collect. This position has expiration break evens (excluding commission) of $116.35 and $73.65. This trade has an initial margin requirement of $1,330 and that can fluctuate.

This trade also has unlimited risk.

The profit objective would be about $800 in the first example, and roughly $1,050 in the second example.

Here's where it potentially gets a little confusing. While I believe we're likely to stay relatively range bound +/- $20 in WTI over the next few months, I would like to also have some "soft long deltas".

Here's what I would do to express my underlying bullish sentiment or to somewhat hedge the potential breakout risk on the topside (Middle east risk flare).

Consider using January Crude options, which expire on 12/14 or 53 calendar days from today.

BUY Jan Crude 101 call and SELL Jan Crude 79 put and COLLECT about .05.
This position is BULLISH. As of today, it has a "soft" long delta of about 30, meaning for every dollar move in CLF13, the options spread (risk reversal) should (theoretically) get better by $300 (on the upside) and worse by $300 (on the downside). Those dollars get bigger the further it moves (delta sensitivity gets greater both ways).

At expiration (Dec 14th), this thing only makes money if CL is over $101 and only loses money if CL is below $79.
6/28 lows on CLF13 = $79.69
9/14 highs on CLF13 = $101.19
In March CLF13 got up toward $110.

Recap, I would consider ONE of the TWO aforementioned short strangles. If you are concerned about upside potential, which makes sense given geopolitical environment, you could pair the short strangle with a Long Call/Short Put in Jan Crude which kind of hedges your upside risk until Dec 14, at which point I would consider closing the strangle or replacing the soft long deltas depending on the state of the world in mid December.

Feel free to call and discuss. These ideas are not exactly cut and dried, especially when used in tandem. There are a number of moving parts, but I believe the potential risk outweighs the potential reward assuming you share a relatively range bound outlook with greater potential for upside breakout.

(I would consider similar range bound with bullish "hedge" plays in Silver as well)

By. Kevin Davitt, Global Execution and Futures/Options Broker

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News