FxWirePro: WTI crude prices still fragile; PRBS to arrest extended potential dips

US crude inventory level checks have reduced to 2.6 million from previous 4.7 millions but this upbeat number exceeded forecasts (0.9 million); as a result crude has shown a little surge in its price. WTI crude futures (CL1!) last week was unable to sustain or break above resistance levels at 45.75 levels, we think any breach below the supports at 43.08 levels would certainly retest this commodity back again at 42.22 levels.

Let's just suppose hypothetical scenarios contemplating prevailing downtrend of WTI crude. Spot WTI oil is currently trading at $44.63. An options trader who is bearish on this commodity and calling for 42.22 levels, let's say, executing 2:1 put back-spread by shorting a near month 4D (3%) In-The-Money put for $163.74 and buying 2 lots of near month contracts 15D (-2.5%) Out-Of-The-Money -0.25 delta puts for $66.82. So thereby the net credit to be received at $30.10 to enter the strategy.

Scenario 1: Upon expiration, if WTI crude flies beyond 45.75 levels which is our technical resistance, both the long puts expire worthless while the short put expires in the money as there is no question of excising rights (US$ 163.74 can be pocketed in). Buying back this put to close the position will result in the maximum loss for the options trader.

Scenario 2: In case WTI crude dives to $43.08 and head towards 42.22 levels again or below on expiration, all the options advocated above would expire in the money. The short side is worth more and needs to be bought back to close the position. Since the two long puts were bought is now worth double, their half of combined value would be enough to offset the losses from the written put.