Key Takeaways with Craig
In today’s column we’re going to take a look at one of our newest products in CME’s suite of Micro products, the Micro WTI Crude Oil options. The volatility in the global crude oil markets has been well-documented in the mainstream and financial press and we’re not going to opine on that, but rather, we want to take the opportunity to describe the characteristics of this relatively new options product.
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 $104/barrel, one MCL futures contract would be worth approximately $10,400 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.
With both monthly and weekly expirations, the new Micro WTI Crude options provide flexibility not only on the notional exposure a user desires, but also allows for precise exposure to things like number releases and economic events.
Let’s look at a very simple example. In late afternoon trading on Thursday of last week, in the Micro WTI Crude Oil option that would expire the next day, the at the money Call (102.25 strike) was trading at about 1.36 and the Put was trading at about 1.31. Again, because these are options on the Micro WTI Crude Oil future which is based on 100 barrels of Crude Oil, these prices represent $136.00 and $131.00 in dollar terms. Therefore, if someone had a belief that the June Employment report, which was scheduled to be released the next morning, would reflect a stronger than expected labor market that reduced recession fears, and in turn, might lead to higher Crude Oil prices, they could assume a speculative long delta position by buying the Call for $136.00. Comparing that to the standard WTI Crude Oil options, which are based on a futures contract worth 1,000 barrels of crude oil, the dollar amount risked in the trade is 1/10 of what it would be in the standard options of $1,136.00. Of course, regular readers of the Key Takeaways column know that options traders must take other factors such as implied volatility, time decay among others, into account when initiating an option position, but hopefully this simple example underscores the flexibility in the amount of exposure that the Micro Options provide.
And speaking of implied volatility, we’ve included a QuikStrike graph of 30-Day implied volatility in WTI Crude Oil options over the last six month. As you can see from the blue line, current implied volatility (at least as of last Thursday afternoon) of 55% is just slightly higher than the 6 month average closing level. However, putting it in more of a historical context, the average closing level over the last 5 years is about 38%, suggesting that even though the current level has come down from recent highs, it continues to trade at relatively high levels.
We encourage our In FOCUS readers to learn more about the Micro WTI Crude Oil options using the following resources:
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