FxWirePro: Vertical spreads to reduce Vega risks of WTI crude

Technical glimpse: On a formation of inverse saucer chart pattern and the confirmation of upto 38.2% Fibonacci retracement on this long lasting pattern would divulge a better clarity of prevailing bearish trend and its sustenance.

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

Currency Option Strategy:

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 in the near term but within a bracket of 5% downward range.

When we have 2.47 Vega with 15% implied volatility on (2.5%) In-The-Money put option which is trading at US$127. This would mean that the chances of upside risks of option prices to reduce by US$37.05 if the underlying exchange rate rallies.

Rationale: 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, we constructed the above strategy by shorting (-5%) deep Out-Of-The-Money put with the same maturity so as to turn vega into correspondingly positive.