Theta signifies time decay advantages on bullish calendar spread on crude oil

Brent crude prices gained 2 cents to USD 65.39 per barrel. US crude prices were up 14 cents at USD 59.86 a barrel.

Global oil demand continues to surprise to the upside, with April data showing no signs of slowdown despite a pick-up in prices.

Japan's customs-cleared crude oil imports rose 9.1% to 3.62 million barrels per day in April from the same month a year earlier, the Ministry of Finance confirmed today.

In China, crude imports volumes punched a record 7.4 million barrels per day in April despite a slowing economy, driven largely by healthy car sales.

Singapore based Phillip Futures said that it expected WTI and Brent July 2015 contracts to remain above USD 58.49 and USD 64.35 respectively, provided oil fundamentals do not change.

Hence, Crude oil futures increased up today, propped up by healthy demand from the US and Asia.

Form Bullish Calendar Spread to Hedge:

This strategy can be created through selling a call option either of ATM or OTM as they are relatively cheaper and buying another call option of same strike price with longer maturity (far month contract).

Profit for such positions may usually be generated due to more time decay to expiration.

The chances of hitting our targets will have Theta (time measure) benefits.

The above strategy can also be converted into a reverse calendar spread or neutral calendar spread.

Break even at expiry would be the strike price plus premium.

The reason why are we advocating a calendar spread is that to ensure sparing the high volatility factor in this commodity market aside.

Caution: For a long option position, theta would usually be negative, but the Theta of ATM options in this case is higher and as time draws nearer to expiry, it increases. If we hold onto an ATM option and expiry is approaching, it would be better off closing out of the current position.