FxWirePro: Vertical ratio-spread to tackle WTI crude’s vega risks

Technical glimpse: On a formation of inverse saucer chart pattern and the confirmation of upto 38.2% Fibonacci retracement on this long lasting pattern would divulge a better clarity of prevailing bearish trend and its sustenance in medium to long term trend. As we had rightly anticipated last checks of the US crude inventory levels have not played any major role to prop up crude's prices and so is the prevailing prices of WTI crude is at 45.60.

Commodity Option Strategy:

With the reasoning briefed above, this vertical put ratio 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. Remember our earlier 1^st targets at 47.44 (i.e. 38.2% Fibonacci retracements) and 2^nd targets at 42.22 (i.e. 23.6%).

Rationale: Always remember the FX option's delta and vega would have the huge impact on a long put position should the market bounce. When we have 2.56 Vega with 15% implied volatility on at the money put option which is trading at US$97.47. This would mean that the chances of upside risks of option prices to reduce by US$38.40 if the underlying exchange rate rallies.

So the recommendation would be "long vertical put spread" that will cut down the exposure if you have dubious rallies in mind, but more significantly it will also reduce the exposure you have to Vega, the relative effects of volatility on the option prices. One way of minimizing the avid appetite on naked long put has for your precious capital is to spread much of the risk by using vertical spreads. Hence, we constructed the above strategy by shorting 3 lots of 7D (-10%) deep Out-Of-The-Money put with the same maturity so as to turn vega into correspondingly positive.