FxWirePro: WTI crude still weaker; backspreads to arrest most likely extended slumps

US crude inventory level checks have missed the estimates but improved from previous levels at -4.4M, as a result crude has shown a little surge in its price. US crude oil inventory checks printed at -1.7M yesterday which is negligibly lesser from forecasts at -1.6M. WTI crude futures (CL1!) today was unable to sustain or break above resistance levels at 43.75 so far, we think any breach below the supports at 43.08 levels would certainly drag this commodity until 42.22 levels.

Let's just suppose a hypothetical scenario contemplating prevailing downtrend of WTI crude.

As shown in the diagram, Spot WTI oil is currently trading at $43.38. An options trader who is bearish on this commodity executes 2:1 put back-spread by shorting a near month 4D (3%) In-The-Money put for $149.99 and buying 2 lots of near month contracts 15D(-2.6%) Out-Of-The-Money -0.25 delta puts for $67.82. So thereby the net credit to be received at $82.17 to enter the strategy.

Scenario 1: On expiration after 7 days, if WTI crude flies beyond 43.75 levels which is our technical resistance, both the long puts expire worthless while the short put expires in the money as there is no question of excising rights (US$ 149.99 can be pocketed in). Buying back this put to close the position will result in the maximum loss of $500 for the options trader.

Scenario 2: In case WTI crude dives to $42.22 level or below on expiration, all the options advocated above would expire in the money. The short side is worth more and needs to be bought back to close the position. Since the two long puts were bought is now worth double, their half of combined value would be enough to offset the losses from the written put. Therefore, he achieves breakeven at $43.56.

Note: For demonstrated purpose we've used similar maturities.