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Thursday, September 03, 2020
Crude WTI Market Neutral Structures
*This performance is only observed with historical backtests and not traded by the company.
Risks & Assumptions
Having risen by over 100 % from its YTD lows, Crude West Texas Intermediate(WTI) is currently showing signs of consolidation. The benchmark has been trapped in the range of $40 - $44 over last 2 month period. As it trades near its 5 month highs, recent correction seen is indicative of range exhaustion with prices likely to swing towards either side of the markets.
The 2 market structures designed on WTI November contract are with market neutral bias so as to avoid getting wrongly caught on either of the sides. It makes use of 4 option legs in order to target suitable price ranges as per volatility expectations. WTI Iron Condor Structure targets a range bound movement for the benchmark over the next 45 day period with annualized coupon earned around 13%. WTI Reverse Iron Condor Structure is beneficial to target high volatility in the prices over the said duration. Risk Reward ratio for this structure is 0.27.
|Underlying||WTI November||WTI November|
|Days to Expiry||45||45|
|Structure||Iron Condor||Reverse Iron Condor|
|Expected Volatility||Low to Neutral||High|
|Net Premium Received/Paid||$0.64||($0.64)|
|Premium as % of CMP||1.51%||-1.51%|
|Suitability||Suitable for clients who are targeting a rangebound movement over the next 45 days. On price basis, coupon received over this period amounts to 1.51%. On an annualized basis, this would amount to roughly 13%.||Suitable for clients targeting high volatility. With net premium payout of around 1.51%, this structure has risk reward ratio of 0.2711.|
|Break Even Points||38.86 & 46.14||38.86 & 46.14|
|Max Profitability||Between BE Points(Between Wings)||Away from BE Points(Away from Wings)|
Risks & Assumptions
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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