Vega risks of WTI crude explains when to employ vertical BPS

As per our forecasts WTI crude oil futures (CL!1) has been extending its loses from last month's highs at around 59 levels to 47.44 in first stage and again below 42.22 levels (our 2^nd target). Currently, on NYME, WTI crude oil futures for August delivery slumped 1.5 dollars from last week to trade at $41.05 a barrel during Europe mid-day hours.

Crude inventory levels: Yesterday's losses evidenced followed by the data release of US oil inventory levels. Prices were at $41.81 (yesterdays high) but could not sustain owing to the release of the inventory data which unexpectedly rose to 2.6 million from previous -1.7 million as reported by the U.S. Energy Information Administration.

Rationale: Always remember the FX option's delta and vega would have the huge impact on a long put position should the market bounce.

So the recommendation would be "long vertical put spread" that will cut down the exposure you have against dubious rallies in anyone's mind, but more significantly it will also reduce the exposure you have to Vega, the relative effects of volatility on the option prices.

When we have 2.47 Vega with 15% implied volatility on (2.5%) In-The-Money put option which is trading at US$127. This would mean that the chances of upside risks of option prices to reduce by US$37.05 if the underlying exchange rate rallies.

With the reasoning briefed above, this vertical bear put spread option trading strategy is employed when the options trader thinks that the price of the underlying WTI crude will fall reasonably in the near term but within a bracket of 5% downward range.