Hi all, I'm really interested in trading Brent volatility (versus CL). But from what I can tell, brent options trade relatively lightly... and the spread is a fat 0.30 on the options. By comparison, NYMEX CL options trade with a 2-4 cent spread. Any thoughts on how I can make this work? Any combination of products will let me trade brent volatility? I thought about trading the CL options and then just relying on the WTI-BRENT spread futures trading on ICE.... but I don't see any options on that spread, so don't know how that'd help.
Trade dynamic synthetic options in the Brent vs the CL options. The dynamic synthetic is pretty close to the dynamically adjusted delta hedge on the opposite position -- e.g. for a synthetic short ATM straddle you would delta-hedge a long ATM straddle, only without the actual long straddle in place. Put your hedge levels close enough together and you can replicate fairly well, with the penalty of greater transaction costs.
This seem like an interesting "work-around" for wide spreads. Could you post an example trade, if it's not too much trouble?
I really don't get you. Any options I hold would still be in WTI, when I'm specifically looking for Brent... its that always changing Brent-WTI spread that I'm concerned about. And I can't find any Brent-WTI options out there for hedging that. I'm looking into getting an 80 contract straddle on Brent. To get that done, if I have to pay half of the 0.40 cent spread... I'm out of pocket paying $16k to the market-maker. That's just ridiculously rich.
In my dream of dreams, someone making markets in Brent options on ICE will message me and say.... For a 80 lot order, I'll quote a market that's 10, 20 cents wide.
Since this is about CL options allow me to hijack... If you see this NYMEX volume report... It shows "LO" option volume at about 100,000/day... While with "CL" options I'm seeing maybe 20-25,000/day... Which is a big difference. http://www.cmegroup.com/market-data/files/NYMEX_Monthly_volumes-2009.pdf Are CL and LO options one and the same? And a $0.04 option spread is about 1%... That's like a $1.00 spread in CL futures... You cannot give up 1% and make money.
Not sure what your question is. But to be as specific as possible: LO is the symbol for the NYMEX-listed American-style options which has CL (WTI futures) as its underlying. As far as the size of the spread... it certainly sucks, and means trading in/out is incredibly expensive. But it's certainly not true that you can't profit off it. I also trade a fair amount of options in other instruments. Heating oil for example (~80-120 lots a month), and the quoted spread there can be as much as 10% of the ATM option value. Whenever liquidity doesn't exist, spreads blow out... and I usually understand it, because the marketmakers depend on that spread. If WTI/Brent both had spread in the 0.40 range, I'd probably still trade it. My main issue right now is that WTI spread is a helluva lot tighter than Brent... so that makes it painful for me to trade Brent, when vola for the two are so closely correlated. (But I have my reasons for wanting Brent instead of WTI...)
CL options (product code LC) are European if I remember correctly and typically traded electronically. American (LO) and Asian (AO) options are typically traded OTC via voice brokers or on the floor. To move size, participants still need to go to the floor.