Hedgers paying more for downside oil protection
Oil had its best week in five years on the back of the Saudi-led coalition air strikes in Yemen, but the gap between the cost of options with a strike price 10% below spot and options 10% above spot is wider than ever. The normalized cost of options at different strike prices and maturities is expressed in points of implied volatility, an output of option-pricing models
As the oil price plunge gained speed in mid-December, the normalized cost of oil options at different strike prices was roughly the same. But as oil recovered, the gap between implied volatility on options with a strike 10% above spot widened relative to options with a strike 10% below spot. In plain English, that means that a 10% drop in oil hurts a lot more people than a 10% rise in oil.
(Copyright 2015 Asia Times Holdings Limited, a duly registered Hong Kong company. All rights reserved. Please contact us about sales, syndication and republishing.)