FxWirePro: WTI crude diagonal BPS to arrest vega risks

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

Crude inventory levels: We believe today's extended losses evidenced only due to the data release of US oil inventory levels. Prices spiked to $49.33 (last week's high) but could not sustain owing to the release of the inventory data which unexpectedly rose to an upbeat 4.7 million from previous -5.5 million as reported by the U.S. Energy Information Administration. Oil futures extended losses from the prior session on Monday as ongoing worries over the health of the global economy fueled concerns that a global supply glut may stick around for longer than anticipated.

So the recommendation would be "long vertical put spread" that will cut 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.

When we have 2.39 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$35.85 if the crude price rallies. So the strategy goes this way, buy 1M at the money -0.49 delta put and simultaneously short 15D 1.5% out of the money put option.

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.