A little history in WTI options: After a little more than two years of being listed, the WTI oil options contract showed us why it was so different… Going into the late November 1988 OPEC meeting, the market was in flux, trading around $14… OPEC was producing way over quotas at around 22.5 mbd vs. 18.5… OPEC eventually reached an accord, prices shot up (+$1.50 off a $14 base) and volatility was crushed from a high of 51.6% pre-meeting to 37.8 post meeting and down to 29.3% soon after… Some traders were so very long volatility going into the meeting, expecting and getting a strong price move… They still blew out! We had never seen an implosion of vol that hard, that fast, nor had we seen traders blow up due to a decline in vol… What we didn’t know was this was just a warmup for the main volatility event (Iraqi invasion of Kuwait, Gulf War, “regrettably”)… By the way, from this OPEC meeting the interview question, “construct an option trade that is long gamma/short vol”, came about… Here is the chart from that period:
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