Crude Oil Options

This morning we started out with a comment from WSJ that said : crude pricing is turning into rangebound trading.

A large trade in WTI options was seen today on the CME platform that underscores the notion of prices stuck in a range. Nearly 15,000 of the July $75 straddles traded between $7.38 and $7.96. The price for the underlying July WTI futures at the time was about $75.30. The sell interest was said to have come from "paper", meaning not from a market maker and thus someone, we assume, who holds a longer term view.

Given that the mid-point for the options values traded is $7.67, the parameters that are thus created within which basically the July futures price needs to stay for the seller not to incur a loss if the trade is held to expiration are $67.33 and $82.67.

Both of these parameters seem well within recent trading levels and are possibly the limits which will barely be exceeded in the coming weeks. The downside risk has been deemed somewhat limited due to the "Biden Put", which suggests that the U.S. government will be buying to fill the SPR when prices fall below $70. Since December 2021, WTI spot futures have been below $69 in only 2 weeks. Those weeks were 6-7 weeks ago. The upside risk seems limited given that over the past 5 1/2 months, WTI has struggled to stay over $83.

Also beneficial to the seller is the fact that time decay in these options will start to accelerate soon. The options have 43 days to live and time decay accelerates?in the last month before expiration.

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