Increasing use of short-term options

Uncertainty in the oil market leads to higher volatility, which, in turn, makes trading riskier and more costly. Margin calls are increased, option premiums are getting more expensive, and consequently, liquidity suffers – almost a self-fulfilling prophecy. Changing times requires a change in attitude and adapting to a new trading environment is only possible through innovation. It is imperative for futures exchanges to offer new products for customers that provide a sound basis for trading and a solid background for continuous investment.

Relatively new tools gradually introduced by  CME Group intend to satisfy ever-changing demand from clients. Since increased volatility, elevated risk and higher interest rates have made traditional oil options trading more cumbersome, especially for smaller customers, the time became ripe to launch new products with a short-term life span. The result was Crude Oil Weekly options expiring on Fridays, which then organically grew into several other products – namely, options expiring on Mondays and Wednesdays.

Two significant factors support the introduction of these new products. Firstly, because of the relatively brief life span of the options, the time value is smaller, resulting in lower premiums the acquirer of the option is required to put up. It makes trading more economical. Secondly, there are regular weekly and/or monthly occurrences that carry substantial risks, such as the EIA reports on U.S. oil inventories published on Wednesdays, the Federal Reserve’s interest rate decisions every six weeks, which directly impacts the dollar and indirectly oil, monthly OPEC meetings and the growing risk of adverse price movement after weekends due to heightened global geopolitical tension.

Short-term options were designed to offer hedging tools against these risks. Nonetheless, the chart above speaks for itself and aptly summarizes the market view. There has been a tangible rise in daily trading volume and open interest of the new products and given that the current precarious trading environment is unlikely to abate any time soon, the trend displayed in the chart is likely to continue.

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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