Table 1: Options Details for the September 2024 Light Sweet Crude Oil Futures (LOU4) on July 22, 2024

Table 1: Options Details for the September 2024 Light Sweet Crude Oil Futures (LOU4) on July 22, 2024
Source: QuikStrike

The absolute value of the delta is also the approximate probability that the option will finish in-the-money. For example, the delta on a put with a $73 strike price (LOU4 73 P) is -0.15:  the options market is implying that on July 22, 2024, there was about a 15% chance the crude oil price would be below $73 by the expiration of the September option on August 15.

Use case: A trader believes that support from OPEC and the SPR refill in the low $70s makes it highly unlikely (<10%) that the September WTI futures contract settles below $75.  However, the $75 put reflects a 25% probability oil settles below $75. The trader considers selling the put and collecting $0.80 in premium.

As no calculations are required and option deltas are readily available, option deltas are often the quickest way to understand implied price expectations.

  1. Finding the implied probability oil is within a range with an option butterfly

Options butterflies provide an alternative look at option-implied probabilities for the oil market. A butterfly is an options strategy that buys and sells puts or calls with different strike prices but the same expiration. A long butterfly involves buying a call at a lower strike, selling two calls at a higher strike and buying a fourth call at an even higher strike. In a standard butterfly, the differences between the high and low strikes and the center strike price must be equal.

Using Table 1 above, a butterfly could include buying the $79 strike call (LOU4 79C) for $1.50, selling two $80 calls (LOU4 80C) for $1.11, and buying the $81 call (LOU4 81C) for $0.82.  The cost of this butterfly is $0.10. The butterfly allows you to profit if the price of LOU4 is between $79 and $81, with a maximum payout of $1 if the price is $80, as shown in the graph below.

Chart
Source: CME Group

Table 2: Bid and Offer Prices for WTI Monday Weekly Crude Oil Options (ML5N4)

References