Futures Trade: Closing CL

We entered a trade last week on the expectation that if odds continued to strengthen that the U.S. will not attack Syria, the added risk premium would be priced out of longer dated options on oil futures contracts. We looked at a November short vertical call spread as one way to trade this expectation.

Since then, November WTI crude has fallen to $104.71, which benefited the short call spread because of the bearish price bias in the trade. But just as significant was the reaction in options markets.

 
IV November CL Options
Source: Condor Options

 

The darker blue line shows the implied volatility for November CL options on September 12th, with the same volatility skew a few sessions later in light blue. The bid in out of the money call options dropped almost a full volatility point in some cases, and that means we can exit the options spread having collected most of the possible profit in a much faster time frame than would have been possible if we were relying on price changes alone.

Trades: BTC LOX3 November 114 calls at $0.28 and STC LOX3 November 116 calls at $0.17.

The trade collected $0.30 to open and costs $0.11s to exit, for a return of 11% on capital risked in less than a week.

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At the time of publication Jared Woodard held positions in CL.