Valor View – WTI Futures go negative on 4.20 – A deep dive

posted in: Crude Oil, Natural Gas | 0
  • Over the weekend, news started to come out that Hin Leong, a major trader of oil products in Singapore filed for bankruptcy. A subsidiary of Hin Leong, Ocean Tankers, which owned a fleet of more than 100 vessels (including 14 VLCCs) also filed for bankruptcy (1)
  • Hin Leong had assets of $700 million against liabilities of $4+ billion and it was reported that they had been hiding losses for many years
  • We are not sure how much this news affected trading but it certainly could have had an impact in the market with everyone trying to find out their exposure to them over the weekend
Hin Leong Group Overview
  • In the last few days before a contract's expiry, financial players generally stay away from the prompt contract (WTI May in this case) as they are not set up to take or make delivery. Hence, the trading is thin in the contract with mostly physical players squaring up their positions
  • Monday (420) was WTI CSO expiry as well and as per CME records, it still had decent open interest on the May/June -$6.00 strike with the spread around -$7.00
  • The day started with selling pressure on May contract and widening of the May/June spread
WPPB Image Addons
  • It appeared that CME was having trouble finding buyers of the contract. Many market makers have said that CME was asking them to place bids on the May contract
  • CME opened the Pandora's box when it sent out a communique in the middle of the day that WTI contract prices can go negative as well. WTI May futures really started to nose dive after this announcement.
  • CME claims that it has been preparing for an eventuality like this since early April. Clearly, not many participants were ready for negative prices on the main index
  • Some market participants such as Continental resources are asking CFTC to look into the issue
  • CME already has a daily average pricing contract and Average Price Options (CS contract) which is used by the major players to hedge their production. This contract is only a daily average though and not weighted by volumes, if that is what Mr Hamm means by daily weighted average.
  • Even the major market participants were not ready negative WTI futures prices. We know first hand that a large online brokerage firm Interactive Brokers (IBKR) stopped displaying bid/ask/last prices for WTI May futures once they went negative. If traders could not even see the bid/ask how could they trade it.
  • Generally, a few days before expiry traders on the platform are encouraged to take their positions off, if they are not set up to take delivery. However, it seems that traders were long the WTI May contract on IBKR and some of them ended up losing their entire capital on forced liquidation by IBKR
  • IBKR has taken a $88 million loss on these positions which lost more than their equity capital (2)
  • Another disaster in the making and adding to the WTI misery has been the USO ETF. Retail money has been piling into USO trying to buy the cheap or negative Oil.
  • Following chart shows the popularity of USO among users of Robinhood, a $0 online brokerage popular with millenials
  • USO had so much money inflow that it had to temporarily suspend new share creation and had to go to SEC to increase the number of units it can issue
  • The problem it created was that USO ETF became the holder of 25% of the Open Interest in the WTI June contract.
  • When WTI May futures contract traded negative on Monday, it became unclear what happens with an ETF if the underlying contracts in the ETF go negative.
  • In an already volatile market, USO management decided to roll it's WTI June contract to July and August further creating chaos on Tuesday.
  • By Tuesday, the WTI May contract had returned back to positive territory, but this unscheduled roll and net selling by USO took the WTI June contract from $20+ to a low of $6.50 on the day. Retail investors lost billions in the ETF in a single day.
  • News outlets have been pointing to the fact that storage capacity is getting full which led to negative WTI futures. However, they are not full yet, they are all leased out but not full. if they were really full WTI May contract would not have become positive the next day.
  • Surely, if storage truly becomes full, WTI prices can go negative again. However, it is a combination of factors that created this "rogue wave"  on a day (4.20) that will be remembered and talked abut for generations.
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Valor View – Natural gas vol & skew making large moves and point to lower futures in the front

posted in: Natural Gas, volatility | 0

– Natural gas option vol has been tricky lately to say the least

– Option Vol in equities and crude has fallen but in natural gas it remains elevated

– As shown in the chart below (May-June contract), except for the second week of March, realized/implied vol has not been performing but IV still remains elevated which leads us to believe that traders still expect a down move in the front of the curve



– As we pointed earlier, put skew went through the roof when front was in 1.80s and it got the direction right as natty tried to break and settle below $1.60 multiple times

– We believe the short covering we are witnessing (as evident in the CFTC report) is keeping the front from falling apart, but the option flow wants natural gas lower

– Skew is making moves that are unprecedented for the time of the year. May contract 10 delta skew (C – P) is -31%. We don’t remember seeing -15%, -20% call skew for that part of the curve ever.

– Total vol on those calls is 50%-55% and we are realizing over 60% right now (shown in above chart), so one can easily create some cheap gamma positions by doing ratio call spreads in the front



– Bullish action is reserved for the back part of the year and Q1’21 as seen in widening of spreads and interest in owning Q1 call spreads. Q1 vol and skew has found a short term peak as they got so expensive so fast that traders are shying away from buying them outright for now. Though, if Q1 ever gets super bullish on lower storage fills and/or production declines, those expensive outright calls are the ones that are going to pay the most still.



– This yin-yang chart below shows this bearish summer, bullish summer sentiment the best. 15% vol skew for October puts and 15% vol skew for January calls. We believe that the market can’t be extremely bearish and bullish 3 months apart and at some point soon, one of those will have to soften.



– Overall, the option action seems bearish the front. Puts are bid, calls are not. Sub $1.00 strikes have started trading for middle to late summer. Close to 20,000 October $1.60/$1.50 put spreads traded last two days. Sub $1.50 put flys are in great demand.

– As an options trade we are happy to own the -20% call strikes. Those will be more profitable on a down move than on an up move, cheap gamma plus potential for vol and skew to go higher.



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Valor View – NG – Vol at new highs

posted in: Natural Gas, volatility | 0
  • Not everyone in NG trading community is all bulled up on potential for lower production
  • In fact, SPG Platts came out an article that Permian associated gas may not slow down significantly because as wells get old they get more gassy. Also, the amount of gas being flared may replace any slowdown in production link
  • Recessionary fears across Asia, Europe and US are also keeping a lid on bullish momentum
  • Schools and offices across US have just started going on forced breaks and will lead to even lower demand in shoulder months
  • We are still seeing lot of Summer trades for strikes 1.50 and lower
  • The skew changes today and total vol levels are indicating bid interest in puts in April and May contracts and then tapered interest after that
  • This probably means that any down moves from here will lead to widening of the price spreads and for the back half off the summer it will be a slow bleed down (if any). This widening will happen also because Q1 has got a bid now on expectation of production being down by year end
  • Until this latest Oil price crash, traders were even showing interest in Oct $1.00 put and Oct/Jan -1.00 put CSOs which have not traded in many years
  • Oct $1.00 put interest and Jan $5 call interest can definitely lead to some interesting spread moves
Top Trades - 03/12
Intraday vol - 03/10
  • May $1.50/$1.25 put spread traded 20,000 times and April $2.25 call traded over 10,000 times today
  • Intraday vol of vol is very high just like the vol of price. There doesn't seem to be any pattern to vol right now, it is just going with any large flow at that time
  • Summer vol is trading levels not seen in a long time and a sharp contrast to implied vol last year where it even briefly went below 20% in 2019
  • IV levels are high also because of what is going on in equities and crude oil which are facing high vol levels as well
  • Chart below shows that implied vol levels have gone up sharply from being the bottom of the range to new highs for the time of the year in last one month or so
Seasonal Implied K-V vol levels
  • These implied vol levels are not without merit though
  • If we look at seasonal Realized/Historical Vol chart, implied and historical vols are going one for one
  • Current vol realization are almost reaching peak winter levels
Realized/Historic K-V vol
  • If not for the historic short interest and crude and equities mayhem, we were looking at a potentially boring shoulder season
  • For the last few days realized vol is even higher than implieds (See chart below) i.e. even at this high vol level, it is paying for itself
  • Vol term structure shows that we can see a slow down in volatility into the summer esp the back half which goes to our point above that spreads are going to absorb the volatility
  • If that is not the case some of the cheaper vol can be found in Q3'2020
Historical vs Implied K-V strip vol

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