WTI Weeklies: Good Options for Brent Traders

The oil market has been trending higher on escalating geopolitical events and a trader has been profiting from a portfolio that feels long Brent futures. He is concerned that meetings between the U.S. government and Russia over the weekend may lead to bearish news and is looking for a hedge against price declines when the market opens on Monday.

Front month Brent is trading at $72 per barrel, while front month WTI is trading at $68.25. With only three days to expiry, the trader notes the prices for put options for next expiry for the Monday Weekly WTI options (ML4H5) are less expensive than the Brent calls expiring later in the month. He consults the bids and offers on strikes just out of the money on CME Direct and decides to buy 150 puts at a $67 strike, $1.25 out of the money. There are 253 lots offered for $.08 so he quickly executes, paying $12K to mitigate drawdown on his $500K VaR portfolio.

On Sunday, headlines begin appearing about a ceasefire. The market opens Sunday night with Brent trading at $70.95 and WTI at $67.25. The $67 WTI put expiring on Monday is now bid at $0.42. The trader considers selling it, which would net a profit on the option of $0.34 or $51,000, or holding it for continued protection if the market declines further on Monday.

A trader is managing risk for a complex portfolio of Brent Crude Oil futures and options. His portfolio is biased to profit when prices decline. Ahead of annual leave the following week, the trader looks to mitigate risk of an upside price move until he returns the next Monday.

Front month Brent futures are trading at $70 per barrel. The trader consults his broker and notes he can buy a $74 May Brent call (BZOK5 74C) expiring at the end of the month for $0.70. He turns to CME Direct and sees a similarly $4 out-of-the-money WTI Weekly call expiring the Friday of week he returns. He lifts the offer, which is shown at $0.45 (LO4H5 C70). He also sells the call expiring the Monday he returns (ML4H5 C70) collecting $0.18 in premium, for a net $0.27 per barrel cost for portfolio protection.

When he returns post-holiday on the following Monday, crude prices have risen. Brent settles Monday at $73.50, while WTI is at $69.50. The Monday call option expires worthless while the Friday option value has increased with gains in both volatility and moneyness to $1.20. The trader can decide to close out the position, selling the Friday call for $1.20 or choose to hold the call until expiry, with a fixed downside of $0.27 in net premium paid.

WTI Weekly options offer flexibility to target risk to specific time ranges and to hedge underlying optionality and unique risks in ways monthly options cannot. The option strategies here are just a few of the ways in which WTI Weekly options can be levered in a broader range of portfolios. Find out more information about WTI Weekly options on our website, or reach out to energy@cmegroup.com.