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The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: The Case of WTI Crude Oil Market

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  • Bartosz Łamasz

    (Faculty of Management, AGH University of Science and Technology, 30-059 Cracow, Poland)

  • Natalia Iwaszczuk

    (Faculty of Management, AGH University of Science and Technology, 30-059 Cracow, Poland)

Abstract

This paper aims to analyze the impact of implied volatility on the costs, break-even points (BEPs), and the final results of the vertical spread option strategies (vertical spreads). We considered two main groups of vertical spreads: with limited and unlimited profits. The strategy with limited profits was divided into net credit spread and net debit spread. The analysis takes into account West Texas Intermediate (WTI) crude oil options listed on New York Mercantile Exchange (NYMEX) from 17 November 2008 to 15 April 2020. Our findings suggest that the unlimited vertical spreads were executed with profits less frequently than the limited vertical spreads in each of the considered categories of implied volatility. Nonetheless, the advantage of unlimited strategies was observed for substantial oil price movements (above 10%) when the rates of return on these strategies were higher than for limited strategies. With small price movements (lower than 5%), the net credit spread strategies were by far the best choice and generated profits in the widest price ranges in each category of implied volatility. This study bridges the gap between option strategies trading, implied volatility and WTI crude oil market. The obtained results may be a source of information in hedging against oil price fluctuations.

Suggested Citation

  • Bartosz Łamasz & Natalia Iwaszczuk, 2020. "The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: The Case of WTI Crude Oil Market," Energies, MDPI, vol. 13(20), pages 1-23, October.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:20:p:5323-:d:427209
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    2. Natalia Iwaszczuk & Jacek Wolak & Aleksander Iwaszczuk, 2021. "Turkmenistan’s Gas Sector Development Scenarios Based on Econometric and SWOT Analysis," Energies, MDPI, vol. 14(10), pages 1-18, May.

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