Crude oil options when future is negative

Discussion in 'Options' started by cesfx, Apr 21, 2020.

  1. cesfx

    cesfx

    Can anybody clarify, maybe after yesterday experience, what happens to a CL put option when the relative future contract goes negative?
     
    Atikon likes this.
  2. ZBZB

    ZBZB

    The may options had stopped trading on Friday I think. The CME were considering listing negative options in June.
     
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  3. cesfx

    cesfx

    I understand, thank you.
    Would they trade in the negative, or be settled at 0 unless listed?
     
  4. guru

    guru


    Logically it could go negative, otherwise who'd cover or gain the price difference between the option implied value and the underlying, if the underlying goes negative?
     
    cesfx likes this.
  5. ZBZB

    ZBZB

    Negative strikes. Option spreads already trade negative. In bonds I buy a credit spread for -7/64 . I am actually receiving money.
     
    Atikon likes this.
  6. narafa

    narafa

    Just normal, the CL put option (If the underlying contract goes negative) will just keep increasing in price (Premium) as per the standard formula, put strike price - underlying price.

    We just learned for the first time ever 2 very important lessons, the first obviously is that commodity prices can go to zero and below (If it happens to Oil, it can happen to any other commodity, as long as the exchange allows it of course). The second lesson is that short puts on commodity futures are no longer limited in risk (as in the underlying going to 0 as the worst case scenario).

    I think the latter is going to have a huge impact on Risk Management all across the world and in the way exchanges & brokers calculate required margins for cash secured short puts.
     
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  7. Turveyd

    Turveyd

    Buy 1000 calls at $2 thinking max risk $2000 if it goes lower it'll likely come back, then end up 60k in debt as it goes negative, nasty.