Crude Oil Strategy to Navigate volatility and Geopolitical risks

Short Strangle on Crude Oil: Navigating High Volatility, Geopolitical Risks, and Accelerated Theta Decay Near Expiry

Crude oil implied volatilities currently sit at 56%, with a strangle on the 5800 put and the 6700 call at vols of 54% and 64%, respectively. The total premium for this strangle is priced at 107 rupees.

For traders considering a short strangle position, it's critical to note the strategy's unlimited risk. Therefore, if you're thinking about shorting a strangle closer to expiry, two essential parameters must be factored in: stop loss and small position size. With heightened geopolitical risks, unexpected and significant overnight price gaps due to geopolitical events are possible.

Here's a scenario analysis of the strangle premium over the next few days, leading to the upcoming expiry on Thursday. This analysis is based on current price levels, assuming implied volatilities remain constant at 54% for the put and 64% for the call. Any changes in volatility will impact actual premiums and potential profit and loss outcomes.

However, with expiry less than a week away, theta decay can accelerate unless crude oil futures make substantial directional moves or IVs rise sharply. As we approach expiry, the impact of the underlying movement (gamma) becomes more influential on the strangle's value than changes in IV (vega).