Technical glimpse: Upon the formation of Gravestone Doji and shooting star patterns on weekly charts along with the healthy bearish convergence from leading and lagging indicators would divulge a better clarity of prevailing bearish trend and its sustenance.

Glance on Oil Fundaments:

We don’t think yesterday’s checks of the US crude inventory levels would not play any major role to prop up crude’s prices.

The long-awaited rebalancing of the global oil markets is at hand. Although oil inventories remain high globally, non-OPEC supply, led by declining US crude output, is falling.

Over the last six months, U.S. crude output has moved lower in 23 of the last 24 weeks to fall to its lowest level since May 2014. By comparison, weekly output in the U.S. eclipsed 9.4 million bpd 13 months ago, hitting its highest level in 44 years.

While U.S. output continues to fall at a rapid pace, OPEC production remains near all-time highs. Earlier this week, a Bloomberg survey showed that OPEC production increased by 240,000 bpd in June to 32.88 million bpd. For the month, production in Saudi Arabia surged 70,000 bpd to 10.33 million bpd, lingering near its highest level on record.

Option Strategy:

On the NYME, WTI crude for August delivery rose 1.09% to $45.63 a barrel.

Overnight, the prices of crude futures are plummeted to near two-month lows on Thursday after the lower than forecasted U.S. inventory that the conclusion of a prolonged downturn in oil prices is nowhere in sight.

With the reasoning briefed above, this vertical bear put spread option trading strategy is employed when the options trader thinks that the price of the underlying WTI crude will fall reasonably but within a bracket of 2.5% downward range.

When we have 2.07 Vega on 1w (2.5%) In-The-Money put option which is trading at US$127, while CBOE crude oil volatility index by 0.17 to 14.59.

Always remember the FX option’s delta and vega would have the huge impact on a long put position should the market bounce.

So the recommendation would be “long vertical put spread” that will cuts down the exposure you have against dubious rallies in anyone’s mind, but more significantly it will also reduce the exposure you have to Vega, the relative effects of volatility on the option prices.

One way of minimizing the avid appetite a naked long put has for your precious capital is to spread much of the risk by using vertical spreads.

Hence, go long in 1m (2.5%) In-the-money put, while by shorting 2w (-2.5%) deep Out-Of-The-Money put with the same maturity so as to turn vega into correspondingly positive.