If there's been a single prevailing market theme in 2015, the sharp drop in crude oil prices would have to be a top candidate.
The spot price for Brent and West Texas Intermediate (WTI), the two most commonly quoted benchmarks for the commodity, are now both down approximately 30% on the year.
For those market participants that are long crude oil or equities in the sector, the pain continued this week as prices dipped to levels last seen during the financial crisis in 2009.
As much as the decline in crude oil prices may be driving volume on worldwide exchanges, it also serves as a symptom and/or barometer of the real global economy. A steep drop-off in crude oil prices is rarely a positive sign for robust cross-border commerce.
Along those lines, a further dip in crude prices could even set in motion several other dominos that could further disrupt global economic activity.
Regarding oil production in particular, it's almost certain that some companies in the sector will face severe financial distress or even bankruptcy. This activity will in turn put stress on the financial institutions that have lent money to the sector as well as governments that rely on revenues related to crude oil.
The ultimate depth of the abyss is anyone's guess at this point.
On a recent episode of The Webinar (aka The Ryan & Beef Show), the hosts discuss the drop in crude oil prices, its impact on their portfolio, and their ongoing approach to trading.
As Ryan and Beef highlight at the start of the show, their existing portfolio has considerable exposure to crude oil prices. The Webinar team then walks viewers through some detailed aspects of their portfolio as well as adjustments they are making to address mounting losses in the sector.
While Ryan and Beef’s absolute exposure is quite low, the exercise serves as a great example of how many other market participants are likely evaluating their current positions in the oil patch.
Because Ryan and Beef were short a good number of strangles in crude-related equity options, they have elected to actively “roll” some of the positions forward according to guidelines presented recently on several other tastytrade programs.
Rolling involves an adjustment in the strike of an option position, an adjustment in duration of the position, or both. A roll involves closing one position in favor of opening another, often similar, position.
While Ryan and Beef chose to “roll” on their show, this may not be the appropriate course of action for every market participant.
Each and every trader has to evaluate their own risk profile and capital constraints. Rolling a trade almost always involves the deployment of additional capital - especially when the position is on the losing side of the ledger.
Crude oil has been a challenging trade in 2015 and the recent sell-off serves as a good example of the delicate balance that exists between risk and reward in dynamic markets.
No matter what position you have held thus far in 2015, each and every trader needs to evaluate their ongoing exposure and make a plan of action for adjusting their existing positions and future exposure.
The tastytrade financial network has produced extensive content related to crude oil trading in both futures and equity options and we encourage you to leverage the search functionality on our homepage to access further information on the subject.
We also invite you to watch the full episode of The Webinar focused on crude oil and portfolio adjustments on tastytrade when your schedule allows.
Also, don’t hesitate to send us any questions or comments at email@example.com.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.