Glance through the outcome of OPEC meeting: As you all might be knowing by now about OPEC meet, in a new ‘Declaration of Cooperation’, OPEC and participating non-OPEC producing countries, including Russia, decided to extend the OPEC/non-OPEC accord for another 9 months beyond the previous March 2018 expiration.
While oil markets reacted with little fanfare, the organization nevertheless succeeded in carefully steering expectations and avert an immediate sell-off, as was the case following the last ministerial meetings in May 2017, when front-month Brent prices fell by 4.63% on the day of the official announcement.
With uncertainty around OPEC’s intentions resolved, short-term implied volatility dropped sharply while longer-term implied volatility continues to trail falling realized volatility. 1-month constant maturity Brent implied volatility fell by nearly four percentage points to below 22%, while 12-month implied volatility was offered at 22.63% (refer above chart).
By way of comparison, 1-month implied volatility was trading some 10 percentage points higher in December 2016.
Going forward, and given OPEC’s apparent commitment to managing oil markets, we expect implied volatilities to continue trending lower, especially on longer-dated options.
Hence, OTM calls and OTM puts of 1m expiries are advocated contemplating above underlying fundamentals.
It has to be executed when the investor is certain that the underlying spot FX would not be very volatile (would neither spike up nor tumble very much).
Upside Potential: Limited to the two premiums received and would be realized when the underlying spot FX at expiry is exactly at the strike price level.
Breakeven Point would be the lower point would be the strike minus the value of two premiums received, the upper point would be the strike plus the two premiums received.
If the investor would like to broaden this band, a sell strangle might be interesting.


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