Key Takeaways with Craig

Due to vacation schedules, we will use today’s Key Takeaways column to put a spotlight on the latest in CME’s suite of Micro products, the Micro WTI Crude Oil options. 

CME launched Micro WTI Crude Oil options on June 6th, giving individual traders and investors another tool with which to gain exposure to the WTI Crude Oil markets in a precise, efficient and cost-effective way.  Because these options will be based on the Micro WTI Crude Oil futures, which are 1/10 the size of standard WTI Crude Oil futures, they will also be 1/10 the size of the standard options, allowing for even greater flexibility in notional exposure.

We’ve put together the following simple, hypothetical example to illustrate the size of these new options:

Assume an individual believed that the price of WTI Crude Oil would continue lower from the current price of 115.17 over the next week and half and wished to use CME Group micro products to express that view.  They could either use Micro WTI Crude Oil futures (MCL) or Micro WTI Crude Oil options to assume a position in the crude oil market.  Due to the heightened volatility in the Crude Oil market over the last several months, they decide to initiate a position in which the amount of capital at risk was defined at the time of execution so they decide to use options instead of futures.

In order to express a view that the price of Crude Oil will decline, the trader can either buy Puts or sell Calls to initiate a position with a negative Delta value.  Since our trader also believes that implied volatility will also decline, they decide to sell Calls and, because they want to define their risk, they decide to sell a Call Spread.   

We’ve included a screenshot of CME’s trading front-end, CME Direct, showing the prices of the Micro WTI Crude Oil options that expire on Friday, June 24th as of approximately 10:30 AM on Wednesday, June 15th (9 days until expiration).  Using the mid-point between the Bid/Offer prices, we constructed the following hypothetical example:

  • Futures Price: 115.17
    • Sell the 115.25 Call for 3.22 ($322.00) | Delta -.51
    • Buy the 118.75 Call for 1.73 ($173.00) | Delta .34
  • The trader collects $149.00
  • The Delta value (using a QuikStrike options model) on the trade = -.17

While a full analysis of all possible outcomes of this trade is outside the scope of this column, we sum up the potential outcomes as follows:

  • If, as the trader believed, the price of WTI Crude Oil falls over the next week and a half (or remains below 115.25), both options will expire worthless and the trader will keep their $149.00
  • The maximum loss on the trade is $201.00 which would occur if the price of WTI Crude Oil rallies to 118.75 or higher

Of course, the above example is that of executing one spread.  If a trader wished to increase their exposure they could increase that in increments of 1, again illustrating the precision in notional exposure that these new Micro-sized options provide.  

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