Oil Options Skew Just Did Something Unusual. Here's What It's Telling Traders.

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The speaker observes an unusual skew in the options market for crude oil futures, with puts trading over calls. This suggests a bearish sentiment, possibly due to the recent geopolitical tensions and the market's anticipation of a price decline. The speaker proposes a short position based on this skew, expecting the price to move lower as the market digests the news and the geopolitical situation stabilizes.

Crude Oil

The speaker suggests a bullish trade by selling a put spread at the 77s and buying the 76s, which is a short put vertical spread. This strategy is based on the assumption that there is a floor to oil prices and that the market is bullish. The trade has a max profit of 330 and a max loss of 670, with a decent credit collected. The speaker acknowledges that the trade is based on the assumption of a floor to oil prices and the potential for another rally above $100.

Market Regime and Price Behavior in Crude Oil

The speaker notes that the recent sharp decline in crude oil prices is not surprising, given the historical pattern where major geopolitical events have typically led to sustained price increases above $100 per barrel. However, this time, the price spike did not hold, suggesting a different market regime. The speaker attributes this to the high volume of money held up in oil-related markets, particularly around the Straits of Hormuz, which is critical for global oil supply. This liquidity and the demand for oil from Asia and other regions are key factors in the market's response to geopolitical tensions.

Market Bias and Risk Perception in Crude Oil

The market bias in crude oil is towards the upside, as indicated by the options skew, where calls are more expensive than puts. This suggests that the market perceives a higher risk of upward movement due to potential supply shortages or geopolitical tensions. However, the skew does not necessarily predict the direction of the price but rather highlights where the market sees greater risk.

Why is crude oil down almost 10% today?

Crude oil prices have dropped sharply due to geopolitical tensions and the potential for a resolution in the conflict with Iran. The speaker notes that while there was a spike in prices during previous conflicts, this time the price did not sustain the increase, possibly due to high liquidity and the critical role of the Straits of Hormuz in global oil supply.

TakeawayThe speaker suggests that the price decline is a result of market anticipation of a resolution to the conflict and the high liquidity in oil-related markets.

What is the market bias in crude oil?

The market bias in crude oil is towards the upside, as indicated by the options skew where calls are more expensive than puts. This suggests that the market perceives a higher risk of upward movement due to potential supply shortages or geopolitical tensions.

TakeawayThe market is currently biased towards the upside in crude oil, indicating a higher perceived risk of price increases.