/CL Option Expiry Alert: High Risk $30 Put Aversion

Today is options expiry for March 2016 Crude futures. I like to run a quick scan of open interest to see at what price levels traders have heavy conviction and to determine the degree of “dealer preference risk” that exists.

Dealer Preference Risk
Someone is on the other side of every options contract. Most of the time, that guy is some sort of institutional dealer. It’s highly likely that dealer will want to hedge or outright manipulate pricing to minimize his exposure to being on the wrong side of an expiring strike. The potential strength of this price preference is what I call “Dealer Preference Risk”.

The scan is very basic. First, I sort – separately for calls and puts, by descending open interest and then I look for ITM and OTM strikes that lie roughly within the average daily range of the underlying.

Today’s Scan
When today’s scan was run, /CL was trading at 29.64 and its 30 day average range was 3.79%. The 30 calls are the least OTM with significant open interest. That said, they only account for ~4% of the largest exposure to calls (OI of 30 calls / OI of all calls with at least as much OI as 30 calls). Looking at the puts, we see that the 30 strike is also the least ITM strike with significant open interest. However, these 30 puts account for ~14% of the largest exposure to puts. Simplistically, “dealers” have 1.7x more exposure should oil close below 30 at 2:30pm today than above 30. However, given those dealers also have significant exposure to 30 calls, they would ideally like to see oil close at exactly 30.

With this information in mind, we can say we’d likely expect oil to trade very close to the 30 level by 2:30pm today, after which, prices will likely adjust to less immediate term sentiment/manipulation.

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