Popular WTI Crude Options Gaining Global Appeal

CME Group has found that options for NYMEX WTI Light Sweet Crude Oil futures have been very popular this year among traders from outside the US during non-US trading hours.

Akin to insurance, oil options enable traders to pay a premium for the right – but not obligation – to buy or sell crude oil at a predetermined price at some point in the future.*

According to a recent report by CME Group, options for NYMEX WTI Light Sweet Crude Oil futures have been very popular this year among traders from outside the U.S. during non-U.S. trading hours. In fact, CME observed last month that such trading is up by more than 20 percent so far this year.

“Simply put, WTI options represent an option to assume a short or long position in the underlying NYMEX WTI Crude Oil futures contract,” Jeff White, Executive Director of Energy Products at CME Group, told Rigzone. “WTI options offer flexibility and a cost-effective way for participants to manage risk around market-moving events like OPEC meetings, weekly government reports and other major market-moving events. Traders from global macro hedge funds to physical oil producers use WTI options each day to hedge risk or express market opinions.”

White, who authored the CME Group report, has found that oil traders who traditionally have hedged with other grades of crude oil are increasingly relying on the WTI for their hedging and risk management. He credits several factors for this trend.

“Record U.S. oil production, better infrastructure and growth of U.S. crude oil exports, coupled with added transparency and around-the-clock liquidity, has enabled trading firms from across the globe to enter the WTI options market for the first time,” White explained. “WTI options are more transparent and accessible than ever before as more than 80 percent of all volume is transacted on CME Global, CME Group’s electronic trading venue – up from only 45 percent five years ago. That means information about volumes, volatility and options pricing is readily available to professional and non-professional energy traders alike.”

Along with greater transparency and accessibility, 24-hour liquidity is contributing to a shift in global oil market fundamentals that is “moving the WTI to the forefront as the preferred contract for price discovery,” said White. “Oil traders who historically hedged with other grades of crude oil have now turned to WTI for their hedging and risk management.”

Rapid growth in trading by non-U.S. traders during non-U.S. hours is “part of a longer trend in our WTI options market” that started after the U.S. lifted its crude oil export ban in 2016, continued White. He pointed out that traders in the marketplace have responded to this and other shifts in crude oil fundamentals by increasing trading activity during Asian and European market hours.

“What’s different in 2018 is dampened at-the-money implied volatility – implied volatility is at four-year lows,” concluded White. “That hasn’t stopped the volume growth of WTI options outside of U.S. hours. During European trading, volume is up 10 percent. Even more impressive, volume during Asian trading is up 25 percent. Unmatched on-screen liquidity means traders can easily access the WTI options markets from any location at any time of day.”

SOURCE: RIGZONE.COM