Report highlights

Rich Excell outlines his method for analyzing options markets, focusing on crude oil. He combines fundamental and behavioral analysis with potential market catalysts to form an options trading opinion using WTI Weekly options.

Image 1: Fundamentals: The supply and demand in the Oil market as per EIA

When I am trying to get a sense of direction in an individual asset or a market overall, I go to a three-pronged approach to assessment. The three areas I look at are the fundamentals (i.e., what drives that market or security, what is the trend), the behavioral (i.e., how are investors positioned, what is priced into the security, what do the bulls and bears think) and the catalyst (i.e., what will get either bulls or bears to change their minds).  I feel that when I have all three of these leaning toward a particular position, it is an opportunity to have a full-sized position. If a couple of them cancel out, and one is neutral, it might be better to sit on the sidelines. There are many other iterations in between. However, the discipline of this approach has served me well. 

When I looked at Oil markets this week, I knew the first chart I would want to understand is the supply and demand of oil as determined by the U.S. Department of Energy’s Energy Information Agency (EIA). The EIA makes a monthly determination of global demand and supply. I have found that when I look at this number, I tend to draw in bands at +/- 1.5 million barrels per day. These levels are one  indication I use to determine if a market is over or under supplied. I show the period in 2021, which I circled, where demand was more than 1.5 mb/d above supply. I can see over this period it was bullish for oil. Similarly, I can see from middle of 2022 to early 2023 there was supply that was more than 1.5mb/d than demand, so this was similarly bearish. When the differential has fallen within this band, there is neither a bullish or bearish signal as there is now and has been for some time. 

Image 2: Fundamentals: OECD Global leading indicators and global oil consumption

However, I also need to try to anticipate how this supply and demand imbalance may play out. On the supply side, I have seen several articles in the past week that has given some indication of the intention of major oil suppliers. In its report for March, the International Energy Agency (IEA) said that global oil demand is forecast to rise by 1.7mb/d on an improved outlook for the United States plus increased bunkering.  World oil supply is expected to fall by 870 kb/d in Q1-24 vs. Q4-23 due to heavy weather-related shut-ins and new curbs from the OPEC+ block.  On March 25, even though the UN demanded a ceasefire in Gaza, which should help oil supply, Russia ordered companies to reduce oil output in the second quarter to meet a production target of nine million barrels per day, in line with pledges to OPEC+. On March 3, OPEC+ announced it would extend its production cuts of 2 mb/d to June. 

I also need to think about demand, so in the chart above I show the OECD G20 Leading Indicators. I can see from the chart that these leading indicators do a pretty good job of leading the global oil consumption number as put out by the EIA that are part of the equation of oil supply and demand I used in the first chart. Putting this all together, it seems like demand may stay firm as supply looks set to be cut in the near term. The fundamentals of oil may be supportive. 

Image 3: Behavioral: Investor sentiment and positioning for managed money in Oil futures per COT

The next thing I want to look at is the behavioral portion of the market. Knowing that all markets have a sentiment or behavioral bias to them, I want to ascertain if traders are feeling bullish or bearish. There are several charts I might look at to determine this. One of these charts is the Commitment of Traders chart from the CME Group. I look at managed money to determine if this group of traders is leaning heavily one way or another. In looking at the net positioning now and through time, we can see that managed money was relatively bullish back in early 2021 and was relatively bearish collectively in early to mid-2023. However, currently the positioning is close to the long-term average position, so there does not appear to be a strong lean one way or another. 

Image 4: Behavioral: CVOL Skew and the Oil futures price

The next stop is to assess the sentiment in the options market. Sometimes, given the strength of the moves or the lack of conviction from traders, I may see greedy or fearful positioning show up in the options market instead of the futures positioning. To check this, I go to CME Group CVOL tool and look at skew. Skew measures the up variance vs. the down variance, or the relative pricing of all call options vs. all put options. We can see from the latest reading, the skew is neither bullish nor bearish, neither greedy nor fearful. If I look back through time, this is not always the case. Before the move higher in Oil futures in early 2022, I saw skew moving higher. Before it came much lower in late 2022, I saw skew preceding this move. The move in skew in late 2023 was more coincident or even late, so it is not a perfect gauge as nothing really is. Right now, with it basically at zero, there is no strong lean I can see in the options market. Overall, I get the sense that the behavioral assessment of the oil market is neutral.

Image 5: Behavioral: CVOL for all Energy products

Adding to this assessment, I want to look at overall CVOL levels not just for oil but for all Energy products. Looking at this, I can see that CVOL levels for all the Energy products are well below their mid-levels and for oil they are very close to the lows of the last year. I look at it and think that being long options is about as cost effective as it has been in the last year.

Image 6: Catalyst: Oil futures technical chart with 50 day and 200 day moving averages

The final part of the three-pronged approach is catalysts. What could happen to get anyone to change their mind. Given there is really no strong view behaviorally, this becomes more about what could happen to get traders to come in off the sidelines. For me, that is technical signals. In this case, I look at QuikStrike where I can view the 50- and 200-day moving average vs. the futures price. I see here that the 50-day is crossing above the 200-day moving average, which can be called the Golden Cross. I know there are some that think this could be a contrarian indicator and I might agree if traders were leaning bullish in the behavioral section. However, given there is a neutral behavioral bias, I think the Golden Cross may be the catalyst we need to get traders involved in a market that is supported by good fundamentals and now has a technical catalyst.

Image 7: Expected return and payoff for a weekly LO1J4 83.5-83.75 call spread

Back when I started my career, we were early pioneers in the pricing of exotic options. One type of option that traders really liked was the “digital.” The digital was essentially a very narrow call spread where there was a payout above (if a call digital) the strike of a fixed amount and no payout if below. At that time, we would approximate that by a call spread with the strikes as close to each other as possible, ideally one tick apart. I have tried to do that here using weekly options. I looked at the 83.50-83.75 call spread. CME Group has Monday, Wednesday and Friday Weekly options, I chose the Friday option as there will be two to three days left by the time this report publishes.

I can see from the table on the right that the cost for this call spread is 7 ticks and the payoff is 25 ticks. One way to think about the probability of occurrence then is that there is a 25/7 or 3.57 to 1 odd on the futures being above 83.75 at expiration. The odds of happening then are 1/3.57 or 28% chance. If a trader thinks that the catalyst of a Golden Cross on top of positive fundamentals suggests these odds of a 2% move higher are greater than that, they can consider this modified digital call spread. It is on way to use defined-risk strategy to express a bullish view. 

Good luck trading!

To subscribe to new issues of this report, visit

The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by [Data Resource Technology]. CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.


CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

© 2024 CME Group Inc. All rights reserved.