Precision hedging of a Crude Oil options position is one of the many features and benefits of NYMEX Micro WTI Crude Oil futures.
Let’s say a trader had purchased an out-of-the-money WTI Crude Oil call option. As a reminder, the underlying future for this option is the WTI Crude Oil futures contract (CL). The CL futures contract is 1000 barrels. Whereas, the Micro WTI Crude futures contract (Globex symbol MCL) is 100 barrels – making it 1/10 the size of the CL.
The trader wants to hedge their delta exposure because since they purchased this call, the market has rallied. They do not want to close out their long call position but do want to lock in any potential profit.
The option is now in-the-money with a sixty delta. For the one call option, this is a delta of .60, or 6/10, of one CL contract. To get delta neutral and lock in any profit, they would need to sell 6/10 of the underlying futures contract, which is WTI Crude Oil futures.
However, there is no way to sell a fractional CL futures contract. But now with the launch of the Micro WTI Crude Oil futures contract, traders have access to a futures contract that is 1/10 the size and 1/10 the delta of the CL.
This means that 10 MCL contracts give the trader the equivalent delta, or exposure, of one CL contract. Our trader, who needed to sell a delta of .60 CL contracts, can now do this by selling six MCL futures.
Now that they are delta neutral and have protected any potential profit, regardless of the market direction, the long call position with a 60 delta could be offset by the short six MCL futures.
Precision delta hedging is just one of the features and key benefits of the Micro WTI Crude Oil futures contract. Discover how Micro WTI Crude Oil futures can be a part of your trading plan.