Applying Option Portfolio Strategy to Manage Crude Oil Trade Risk

Abstract

Since February this year, the conflict between Russia, one of the important exporters of crude oil, and Ukraine has gradually intensified, causing the international market to worry about the supply of crude oil. Together with the speculation in the United States, international oil prices have been moving higher. We use an option portfolio strategy for hedging to offset the increased costs of crude oil purchaser firms with profits in the financial markets. We use a binomial tree option pricing model to calculate the crude oil option price and use it to derive its delta value. The option portfolio is constructed by selecting real and flat options based on the delta-neutral results. After comparing the results of the analysis, the call inverse ratio spread option is optimal and the bull call option is the next best. The protective strategy constructed using crude oil futures has good risk control but limited profitability. Finally, put forward suggestions for enterprises who uses derivatives for hedging.