Buy option strategies…. The current oil market is a perfect example of why options markets are useful in translating traders fears and aspirations into market positions… For a geopolitical event, like Russia/Ukraine/NATO, when an attack is “imminent”, buying call options is a way to protect or profit from a potential spike in price… And, if the event does not occur in time (March options expired yesterday), all that is lost is the premium.. The QuikStrike chart below shows the skew, or the difference in implied vol between an out of the money call and out of the money put (in this case using a .25 delta)… Many news outlets were looking for an attack around the 14th and you can see this show up in the skew chart as calls got more expensive than puts from a vol perspective… Oil producers taking advantage of high oil prices can combine expansion plans with out buying for protection (and still participate in upside… many producers hedged using futures and did fully join the upswing)…. Bearish speculators can buy puts to play market weakness (Iran?) and should prices continue moving higher all that is risked is the premium…
But nothing is free, of course… Option buying bids up prices… Implied vol is running around 45% which could be around 12 to 15 points premium, or more… Prices are high, at time when vol tends to be below average… The long term average for implied vol is around 33%… In early 2014, implied vol set and all time low, around the mid teens, with prices in the 100’s (But… Russia wasn’t massing troops, Iran, Covid, etc..)… And, time goes by… March call buyers need to pony up more cash to play again…
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