FxWirePro: WTI supply glut likely to intensify pressures on bulls - ‘DCCS’ spread to spread returns regardless of swings

14 September 2016, 15:16
Eko Rediantoro

Crude prices extend losses Tuesday on the bearish report by IEA. In its September report, the IEA noted a slowdown in demand.

As a result, the market is likely to remain oversupplied next year. Its 2016 forecast for demand cut by 100,000 bpd; 2017 by 200,000 bpd.

Oil traders continued to weigh prospects that major oil producing nations will freeze output to support the market when they meet later this month.

Overall, we could foresee weakness in the price stability in the short run, consequently, WTI crude prices for October delivery on the NYME slumped 99 cents, or 2.14%, at $45.31 a barrel.

Technically, since February crude price consolidation pattern shouldn’t be disregarded as well, the price behaviour has been oscillating between $40-$50 ranges from the last couple months.

At current juncture contemplating above bearish indications, on speculative grounds we recommend shorting via ITM calls. So it is advisable to initiate Diagonal Credit Call Spread (DCCS) in order to tackle both short-term dips and major uptrend.

Well, as shown in the diagram, one can capitalize on prevailing dips of this pair one can load up shorts in ITM calls and longs in either ATM or OTM calls in a credit call spread with a narrowed strikes and tenors (please be noted that the tenors used in the diagram is for demonstration purposeonly, use appropriate tenors as suitable for your hedging requirements).

While consolidating pattern sees uptrend that could be arrested by the longs of the ATM calls with far month expiries.

Option sellers can reap the benefits of a high Theta near expiry by selling short-dated ITM options with the expectation of little to almost no market movement.

Well, in above case of diagonal credit call spreads, the strategy could be constructed at net credit, the short leg would be absolutely at profits when underlying spot remains either at strikes chosen or at higher than strikes on expiration of short side.

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