Key Takeaways with Craig

On the day before the FOMC rate announcement, US Equity prices struggled to find direction but closed slightly higher while the US Treasury yield curve flattened.  Specifically, the Micro 2-Year Yield was up by 5 basis points and the 10 and 30 Year Yields were down by about 3 basis points.  According to CME’s FedWatch tool, the Fed Funds futures market is pricing in the following rate hikes:

May (tomorrow): 50 basis point hike

June:  75 basis point hike

July 50 basis point hike

Given all of the price action and volatility we’ve seen over the last months in CME’s Energy markets, we thought it was a good time to highlight an announcement that we made today in the current edition of In FOCUS.

CME Group announced (pending regulatory review) that it would be introducing Micro WTI Crude Oil options on June 6th, 2022.  These options will provide the marketplace another product with which to gain exposure to the price of WTI Crude Oil, with the flexibility that Micro-sized contracts provide and all of the functionality inherent in options products. 

Micro WTI Crude Oil futures (MCL), at 100 barrels per contract, are 1/10 the size of the standard WTI Crude Oil futures.  In other words, at today’s price of about $102/barrel, one MCL futures contract would be worth approximately $10,200 of WTI Crude Oil.  Because the Micro WTI Crude Options are based on this smaller future, the premiums associated with the options will also be approximately 1/10th of the premiums on the standard WTI Crude Oil options. 

Let’s take a look at an example from today’s WTI Crude Oil markets.  The screenshot below is of CME Group’s trading front-end, CME Direct and depicts the current WTI Crude Oil options markets for the option that expires this Friday (3 days from now).  If we take the mid-point price of the at the money (102.25 strike) Call and Put we find that the 3-day, at the money straddle, is trading at approximately 4.53.   Because this option is based on the standard size WTI Crude Oil contract, in dollar terms, this straddle, that expires this Friday, would cost about $4,530 (as regular readers of the Key Takeaways section know, the higher the implied volatility, the higher the cost of the option, all else equal, and WTI Crude Oil continues to trade at historically high implied volatility due to the uncertainty in the global oil markets). 

However, if we assume we would be able to get a similar market in the Micro WTI Crude Option on Globex when it is launched (there is no guarantee that the markets in the standard and micro options will be the same and there are some differences in the contract that could cause slight valuation differences, but for illustration purposes, we’ll make this hypothetical assumption), that same straddle in the Micro Option would cost, in dollar terms, about $453.  As you can see from this very basic example, the new Micro options will allow for even greater flexibility and customization of exposure to this global crude oil benchmark.  

Today's Future Price Action

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