Following last week's US election, financial markets now have to deal with another, even greater concern: the potential for six weeks of political posturing between the President and Congress over how to deal with the elimination of tax cuts and various spending programmes on January 1. This uncertainty also called the fiscal cliff (yes, I tried to avoid the words as everyone is beginning to suffer from F.C. fatigue) has left energy traders fearing a potential downside move. This is helping to keep out-the-money OTM put volatility elevated, as the consequence of failure to reach an agreement could send prices much lower.
The volatility skew, as seen below, indicates good demand for put protection, although it has eased somewhat from last week. Traders are still speculative net-long both WTI and Brent, and as we approach year-end, the need to limit potential losses will be increasing.
The three most traded option strikes during the past week are Jan13 110C (last @ 0.08), Jan13 70P (0.10 last) and Jan13 80P (0.96 last).
Gold put volatility is lower over the last week, as the yellow metal has stabilized following the pre US election sell-off. Overall at-the-money volatility continues to trade near the lowest levels for at least five years, with options traders happy to sell whatever premium they can get hold off on the expectation that the price is going nowhere fast in the near future.
The two most traded option strikes during the last week are Dec12 1800C (last @ 1.3) and Dec12 1700P (last @ 7.5). The December strikes expires on November 27.