FXWIREPRO: Vertical Spreads to Hedge WTI Crude's Further Upside Risks

FXWIREPRO: Vertical Spreads to Hedge WTI Crude's Further Upside Risks

Crude Oil is pulling away from the market’s biggest storm in seven years. A measure of price volatility has tumbled from the highest level since January 2009 as the market frenzy eases amid a potential pact between the world’s largest producers to freeze output.

U.S. crude futures for May , were down 7 cents at $41.45 a barrel (at UTC 05:05), after settling up 0.8% at $41.52 on Monday.

The previous front month settled at $39.91 before expiring on Monday.

Technical glimpse and hedging frameworks:      

Buying momentum has been intensifying as it has broken crucial resistance at 37.75 levels on an intraday terms but when we consider the short-to- intermediate term trend of this commodity it shows a short term targets upto 42.22 levels and even upto 42.90 a barrel where a stiff resistance is seen.

In addition to that, "Dragonfly doji" is traced out at 33.75 on monthly plotting, this has been able to prop up prices effectively after breaking 33.23 support decisively, at this juncture all leading oscillators converge rising prices.

As the bulls have shown clear buying interest at this juncture (lows of 2009) to substantiate the leading indicators on monthly, crude oil is crawling reluctantly between minor gains and losses during Asian trading session on Tuesday ahead of tomorrow's U.S. supply estimates in focus.

The American Petroleum Institute will report estimates of U.S. crude and refined product stockpiles later on Tuesday. On Wednesday, more closely watched figures are due from the U.S. department of energy.

So, as shown in the diagram, we like to deploy 1M in the money WTI +0.51 delta call option (1% strike)and simultaneously, short an out of the money call (2% strike) of 1W tenor with positive theta or closer to zero.

This would mean that the chances of upside risks of would be taken care by long positions (ITM calls).

The hedging cost would be reduced by short positions as shown in the diagram if the underlying commodity price rallies after 1 week and prices stay stagnant within shorter tenor (should not go below 1% in 1W).

Vertical bull spread strategy is employed if you think that the price of the underlying WTI crude will rise reasonably in the longer term.

The material has been provided by InstaForex Company - www.instaforex.com