FxWirePro: Is WTI price bullying with slumps? A run through as to how PRBS mitigates bearish risks

The long-awaited rebalancing of the global oil markets is at hand. Although oil inventories remain high globally, non-OPEC supply, led by declining US crude output, is falling. Based on this, as well as solid global demand, we anticipate slight global stock draws in H2 2016 and significantly bigger global stock draws next year.

We are cautious on the near-term price outlook due to downward pressure as crude returns from disruptions. However, we become more bullish as we progress through next year, when we forecast steadily increasing prices driven by global rebalancing.

The WTI oil is currently trading at around $45.52; the hedger who is bearish on this commodity executes 2:1 put back-spread by initiating following trades.

Let’s just suppose hypothetical scenarios contemplating prevailing major downtrend of WTI crude.

Calling for 43.36 or below levels in medium run, and shorting a near month 4D (2%) in the money put for $129.34 and go long in 2 lots of the same near month contracts 1W (1%) In The Money & At the money delta puts for around $187.08.

So thereby the net debit would be reduced to enter the strategy and any potential downswings would be taken care by 2 lots of puts.

We can see the gamma difference at current spot reference, for dip in the underlying price of the commodity which means the rate of change of the Delta with respect to the movement of the rate in the underlying market. But it is even better if the dips occur after 4 days as we have a short position in the strategy.

In the Sensitivity table, Gamma shows how much the Delta will change if the underlying rate moves by 1%.

A smaller Gamma means the Delta is less likely to change as the underlying market moves.