From the February 01, 2012 issue of Futures Magazine • Subscribe!

How to value equities using commodity futures options

In mid-December 2011, the Organization of Petroleum Exporting Countries (OPEC) surprised the energy markets by deciding to increase oil production with a new output target of 30 million barrels a day. Bloomberg reported that crude oil for January declined $5.19, or 5.2%. On Dec. 14, March crude oil fell $5.11 to $95.37 — up from $76.53 on Sept. 4, but at the time on a short-term downtrend.

“March 2012 calls” (below) shows four energy futures: Crude oil, heating oil, natural gas and gasoline, along with March calls on Valero Energy Corp. On this chart, option prices and underlying futures and stock prices are standardized by dividing by the strike price. The comparison indicates that the equity options of Valero are significantly more valuable in terms of future price volatility than options on the four energy futures. Crude oil and gasoline calls are bounded by the more volatile (in the option sense of the word) natural gas and the less volatile heating oil contracts.

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