Horizontal Spreads: Using Weekly Crude Oil Options to Lower Trading Costs
Weekly WTI Crude Oil options have grown in popularity over the last two years, driven by their targeted risk exposure and lower premiums. In response to trader demand, CME Group has expanded the suite of Weekly option expiries from Fridays to expiries for every day of the trading week, available to trade four weeks into the future.
The abundance of expirations now available for Weekly Crude Oil options creates new opportunities for hedging portfolios and capturing asymmetric risk. The work below demonstrates how traders can use a combination of a long and short WTI option position across different weekly and monthly expiries. These positions, often called horizontal spreads or calendar spreads, allow traders to hedge or express points of view on price or volatility across different time windows, and benefit from lower trading costs.
Short term protection for a bear portfolio with a long horizontal weekly call spread
A trader has built a portfolio that is short WTI futures, reflective of his bearish view around spare capacity and the economic outlook at high oil prices. The trader is concerned that increasing geopolitical instability could drive prices higher over the upcoming long weekend and is looking for a hedge against rising prices.
Example 1
On August 26, October crude oil is trading at $86 per barrel. The trader buys a $90 call option expiring the following Friday, September 4, paying $0.50. He also sells a $90 call option expiring Tuesday, September 1, right after the holiday weekend, for $0.20, net paying $0.30 between the two trades.
| Buy LO1U4C $90.00 | $0.50 | Net Pay $0.30 |
| Sell NL1U4C $90.00 | $0.20 |
Assume the trader is correctly concerned about escalating geopolitical risk and rising prices. The market settles on Tuesday at $89.50, with volatility also climbing. The Tuesday call option expires out of the money and is worth zero. The increasing moneyness and volatility drives the Friday option up to $2.30. The trader can decide to close out the position, selling the Friday call for $2.30, netting $2.00 on the option strategy ($2.30 less the $0.30 in premium paid). He may also choose to hold the call until expiry with downside in the trade fixed at the $0.30 net premium paid.
If the trader were incorrect and the market remained at $86 or fell, the Tuesday call would expire out of the money. The Friday call would also decline in value and the trader can decide whether to sell it for its residual value or let it expire worthless, losing a maximum of the $0.30 net premium paid.
Expressing an OPEC point-of-view with short horizontal put option position
A trader notes that the oil market has been range-bound with WTI trading between $73 and $76. She expects that this will remain so until the next OPEC meeting on November 30 — 10 days later, which could be a catalyst for prices to move sharply lower.
Example 2
The trader considers buying a $73 strike put option on January WTI, with a premium of $2.75. However, she’s unsure the move lower will be sufficient to cover this cost. Since she expects a range bound market for the next two weeks, she decides to also sell a $73 put expiring the Friday before the OPEC meeting, which is priced at $1.85. The trader has lowered the cost of entering the trade from $2.75 to $0.90.
| Buy LOF5P $73.00 | $2.75 | Net Pay $0.90 |
| Sell LO1Z4C $73.00 | $1.85 |
If the trader is correct, and the market remains above $73 until the Friday before OPEC, the short put will expire worthless. She can carry the long put position into the OPEC meeting, profiting if price falls below $73 and/or benefitting from higher volatility.
If she is incorrect and the market moves below $73 before the OPEC meeting, the loss on the short put will often be more than offset by gains on the long put, which will benefit from less time decay.
Options spreads across multiple tenors offer unique benefits arising from varying profiles for time decay and changes in volatility or price. With liquid WTI Weekly options expiring every day of the week, as well as monthly expirations, traders have flexibility to create risk profiles tailored to their crude oil views and portfolio characteristics.
WTI Weekly Options Contracts
Weekly options contracts are available with expiries each day of the week, for up to four weeks into the future. Contract details are linked in the table below, and
| CME Globex | Bloomberg | Monthly Option | Underlying Future | |
| WTI Crude Oil Monday Option | ML1-ML5 | IMLA Comdty | LO | CL |
| WTI Crude Oil Tuesday Option | NL1-NL5 | IOLA Comdty | ||
| WTI Crude Oil Wednesday Option | WL1-WL5 | IWLA Comdty | ||
| WTI Crude Oil Thursday Option | XL1-XL5 | IZLA Comdty | ||
| WTI Crude Oil Friday Option | LO1-LO5 | CLWA Comdty |
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
