Hi guys,

I'm a long-time 2p2er, but using an alternate account (PMed ahnuld about this, so hopefully should be ok).

Anyways, I'm currently an oil options trader at an investment bank. I started about 10 years ago as an analyst (i.e. fresh out of college), and have been at it since then. I also did some stints in credit and rates derivatives as well in the early 2010s. I'll try to be as specific as I can without giving too much identifiable information.

I remember this forum being really helpful when I was trying to get up to speed about financial jargon, and to understand what was going on during the financial crisis. That said, I thought it might be a good opportunity to do an AMA about my job, markets, banks, buy- vs sell- side, trading, sales, poker, whatever. I'll usually be busy during the day (shocker, I know), but will try to field questions as soon as possible.

Looking forward to hearing from you guys!

What value do people in your line of work provide to the world?

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Have we reached Peak Oil yet? If not, when do you think we will?

If you were trading alone, without firm [capital, access, systems, information, etc], how would your edge on the market look?

Is LukOil a good buy in your opinion right now?

Where were you when oil traded below -$30?

Do you basically just sell volatility, or is there more to it?

As an oil options trader do you take fundamental positions or make markets? Is your main focus mispriced options and volatility speculation or more geared towards directional bets? Are you involved at all in the derivative products or the crack spread?

I traded CL/HO/RB futures for years but mainly for the movement and volatility while paying little to no attention to the fundamental side of things. Since the big selloff in 2014 these markets have turned mediocre and lost much of the volatility that made them appealing to me. Some decent trade pops up now and again but nothing sustained like the good old days.

I think compared to other asset classes, commodities trading actually does more directly add value to the world. One way to think about how banks operate for commodities is that they often function as pseudo insurance companies.

For example, suppose you are an oil producer - you own tracts of land that presumably have oil underneath them, and you invest in the capital to extract that crude oil and sell it down stream to buyers. Your company's primary asset is the land you own (and obviously the oil beneath it). As a result, you are really long the price of oil: If it goes up, your valuation increases and all is well; but if the price plummets, not only is your current revenue stream worse, the PV of your future revenue streams gets massively impacted.

One way to help this is by buying downside protection from a bank. You can lock in a minimum amount of revenue you generate from your contracts. I think something like this is clearly value added for the company, and for the stability of our energy institutions in general. Obviously, it's not going to compete with the immediate satisfaction or something like building houses, but few office jobs really can offer that.

I just want to preface this by saying that this question is sort of beyond my wheelhouse. As a trader, most of the time I'm thinking max 3-4 years in advance, with a lot more focus on stuff happening in the next few months. So please take my opinion with a massive grain of salt.

When I think of Peak Oil, I think of the point where long term extraction costs for oil cross over and become more expensive than the value of the oil itself. There are a lot of confounding factors in coming up for a date for this, but if I had to guess, I think we'll get to this point in about 10 years.

The big reasons are that costs for alternate energy sources are becoming cheaper, so as a substitute, I expect demand to fall over the long run. Additionally, with the rise of more remote working, and general lack of necessity for in-person events, I expect energy demands broadly to decrease.

The biggest thing standing in the way is oil supply. I think in the short (1-2 year) term, it's likely OPEC starts cutting production. Even though they don't have the pricing power they did in previous decades, this still affects the global supply substantially, and will act as a floor on pricing, and may lead to a spike if Saudi decides it wants to cut production. In the medium term, however, I expect most of the weaker OPEC members to cheat more than normal, since so much of their national revenue is tied to the price of oil. As a result, I think it's more likely that we average below $50 over the next five years than above it. There is enough oil underground in the world that I don't think lack of global availability will be the issue - I think it's lack of incentives to cheapen the extraction process, while oil becomes outcompeted from a price perspective from alternate energy supplies.

I think given my experience, the edges I would have would be on understanding kinks in vol curve and skew due to flow, and finding intelligent ways to extract good Greeks from a portfolio. In theory one could do this independently but there are two big hurdles:

1. Capital - Getting an account on CME / ICE is really expensive. It's very hard for someone with say $10mm in capital to get cleared for these and also be able to trade enough size to see the returns they want.

2. Data - One big advantage a bank has is that we have data going back a long time. Not just on settlements and historic forward curves, but also lots of data on vol curves, vol skews, grades...etc. By moving, you lose a lot of this, and it's quite hard to replace. Even Bloomberg tends to purge their data pretty quickly (and honestly, their vol data is kind of bad anyways), so you're starting from a position of informational disadvantage.

I think most guys that want to trade their own book sit in a hedge fund with strict drawdown limits. Typically the deal is that they give you the capital to trade your book, and you get a fixed percentage (roughly 12-15%) of your P&L. If you draw down below $X, they stop you out and lower your risk limits. If you draw down below $Y, they fire you. The issue with this set up is that is disincentivizes taking longer term, higher-EV positions. Most of the guys in this role don't really look at options much - they want to think in terms of directions, or relative value (like the difference between the price of gasoline versus crude oil).

I think if you had enough capital to comfortably trade the size you wanted, and the patience to deal with draw downs, it's an ideal setup. However, very few people have both of those.

I have no idea - this is probably a better question for somebody who follows equities. One restriction of being at a bank is that we can't trade stocks that are directly related to our mandate (unless its part of a diversified index), so I have no view on this.

I was in the office the day before (we had a massive sell off then), and I was at home on the negative day. Fun times.

There is a lot to the second part of your question, and I think there are some really interesting discussion points. I will get back to this when I have some more time, but I promise I haven't forgotten about it!

I do very little fundamental analysis. I think most of the research publications all have tidbits of interesting ideas, but their views by and large are not tradeable. I think there are way too many eyes on the oil market, so any easy trades are pretty much priced out. There is value on the fundamental side, but it requires either a ton of work, or some inside knowledge, or both to trade effectively.

The mandate for me is to make markets for clients and manage the risk of our book. Making markets gets us say 30-40% of the trades in our book, but I spend maybe 5% of my time on it. The vast majority of time, I'm trying to figure out what to do with risk, or less sexily, work with IT and our internal teams to improve systems and processes.

My primary role is trading options, although the teams are lean enough that I need to be able to proficiently wear the hat of a distillate/crude/NGL delta one trader. I definitely trade diffs and cracks regularly as well, but I wouldn't be as active in that space as say, our distillates trader.

Volatility is definitely down a lot over all the oil-based commodities. As a vol trader, there are still good opportunities to trade, but they require a little more background. It's much harder to say something like "the daily breakeven is $1.75 which seems to rich, let's sell vol" and have it be a consistent winner. Generally, I'm looking for good RV opportunities given the current market environment.

So there is actually quite a bit to unpack on this, but here is my take on it.

If you look at a pure EV standpoint, there isn't much better you cna do that selling volatility and managing the Greeks. Regardless of asset, if you look at a long-term realized vol vs implied vol chart, you'll see implied consistently price above realized. That means vol is sort of expensive, and it's -EV to buy it.

That said, I think one thing that happens, especially on a poker forum, is that people get too enamored with EV in a vacuum. A lot of times the goal isn't necessarily to maximize EV, but do perform well on a risk-adjusted basis. That means my goal is to maximize my P&L while keeping metrics like my Sharpe ratio and VaR+ in check as well. The problem with just selling volatility is that it's hard to to this. The reason for that is that short vol positions have potentially large drawdowns, and require some active management to mitigate those losses.

Instead, what I like to think about is how to maximize my expected return, given some risk profile. For example, let's say I have 500k of VaR that I can trade in a book. A WTI straddle expiring in 2 months is $5, but my analysis shows on average it will realize $4. I can try to sell 1000x of these, but the VaR cost is something like 250k. I've exchanged $1 of EV for half my total VaR risk over the next two months. Another option is that I can trade something like a $10 wide costless collar delta-hedged. Because of the skew, I can collect $0.30 on this, and also expect to take $0.10 or so scalping the Greeks. The VaR cost of this a lot smaller, say 100k. As a result, I can put on 2.5x the size of this latter trade, collect the same expected P&L, but have much less drawdown risk.

Another really big thing that's true across the market (but particularly affects banks) is that people care about drawdowns a lot. Let's say there is something in the market that costs $1, but you know for sure that it will be worthless in six months. In the past, putting this on was a no-brainer. Nowadays, you're scrutinized a bit more, and thus might get stopped out along the way even though fundamentally trade be right (think about a scenario where the $1 thing rallies to $2, then maybe to $3 and $4). Obviously, you can't guarantee something will be "worthless" or whatever at some point in the future, but you can see that you need to evaluate value now versus what the future value of this trade may be, and try to optimize as well. Selling vol performs poorly on this as well, because it tends to blow up precisely when your position is bleeding.

One way to think about the oil market is that there are two broad types of players: passive and active. Passive guys are the ones that put on an options position and don't trade around it once it's put on (think of something like an airline that buys calls to hedge their fuel cost risk). The active market is paying attention to stuff like vols, skews, breakevens,...etc. Generally, the passive market is long vol, and the passive market is short it. The way that the active market makes money is by being short vol, but there are smart ways to manage this risk, and find good trading opportunities.

There are also some secondary things to consider. First, if the active market is generally short vol, on a big move (e.g. unexpected OPEC headline, geopolitical breaking news,...etc), everybody has negative gamma, and as they hedge this exposure, it exacerbates the move. Additionally, it's much easier to be long gamma, especially when juggling other obligations. There is a serious dollar value to not spending all my time looking at a chart and trading out of the gamma, so that shouldn't be discounted either. The last thing is that psychologically, people hate paying theta. As a result, a lot of guys will try to sell vol, especially when vols are cheap (they are collecting less theta when options are worth less, so want to sell more to collect the same dollar amount). That means there are opportunities when implied vols get cheap as well.

So, long story short, yes selling vol is the primary way the active market makes money, but there are a lot of more intelligent ways to find value, while also not risking as large of drawdowns.

What kind of skew is there in CL these days? I haven't looked at energy options in decades. I only traded them sparingly as part of a bigger basket of speculative commodities, so I never made markets in them like I did in interest rates.

But if I recall oil always was skewed to calls unlike stocks and bonds which are always skewed to puts. I am guessing this is because the panic/shock move in oil is the upside surprise rather than the fear of a stock crash coupled with covered call selling. Then again I have no idea what the skew looked like with the negative oil shock earlier this year? That had to be a mess

There are always times to lean short or long volatility but I am guessing you probably stay relatively neutral on the greeks while extracting all of the execution edge that you can. It can often look cheap while being expensive and visa versa and that is where experience counts most.

How uniform is your coworkers pedigree? What defines if someone is 'inside' vs 'outside' your world?

How did the negative oil event from earlier this year go down in your industry? Did anyone bust?

My entire time in oil, put skew has been at a premium to call skew, except for a couple of geopolitical spikes. There are a couple reasons for this:

1. Producer hedging has more volume than consumers. The amount of put buying interest from oil producers is just higher than the call demand from consumers. Producers do more volume in WTI than Brent, and thus the WTI put skew is a little higher. In products like RBOB and Heating Oil, the call skew is still under puts, but is relatively higher than in crude because there are relatively more consumers.

2. Vanna, since vols and price are generally inversely correlated. When we think of second order Greeks, we're mainly thinking of gamma (change in delta as the underlying price changes). If you are short a put and long a call and delta hedge the position, yuo have a portfolio that has no delta or vega risk day 1. Say the price comes off. You get shorter vega (the short put's vega increases, while the long calls vega decreases), while vols are rallying. The inverse effect happens if we rally. This is sort of a "vega-gamma" effect, so if you want to keep your risk flat, you end up paying up to flatten that position. As a result, put skew should have more value than call skew unless that relationship falls apart.

When I joined about 10 years ago, our Sales and Trading class in New York would be something like this:

50% NE Ivy/Ivy-adjacent/top LA (Ivies, MIT, Amherst,..etc)
20% Northeast alumni-network non-Ivy target (UVA, Penn St, SUNY, Duke, ND,...etc)
15% Top 20 non-target (Stanford, Caltech, Vandy..etc)
10% Top non-target state (UMich, Cal, UT,...etc)
5% Everything else

I think nowadays the breakdown is sort of similar (sucks, but recruiting networks are strong) but the distribution of majors is quite different. For my incoming year, the trading class was about 50% STEM, 40% Finance/Econ, 10% other. Now, we're seeing a lot more demand for technical skills like basic programming and problem solving. I'd say now it's like 80% STEM, 15% Fin/Econ, 5% other. Generally, if you're a finance/econ major you need to prove that you have the technical skills to do the job.

On the sales side, we still get more non-technical non-business majors, but even there we're seeing more of a demand for finance/STEM. I would say that if you want to do this job, and you're about to go to college, get a STEM degree that's not going to trash your GPA.

In general, success in trading doesn't really come from getting in and just doing the motions. You need a certain amount of drive to want to get better, learn more, and do some work on your own. Those skills cna sort of be taught, but it's typically way easier to find someone really hungry and motivated than to get a smart slacker to succeed. People make the mistake of thinking GPA is everything, but robots who just know how to study tend to be terrible traders. I'd much prefer a person who gets a 3.7 in math and has actual hobbies (hopefully ones that are trading adjacent!).

As far as the inside/outside question, I'm not sure I understand. Can you please clarify?

EDIT: I also have some more thoughts about the recruiting process in case people are interested, but it might be more relevant for another post. Let me know if this is interesting and I can talk about that.

It was a pretty wild 3 days of trading. That said, the negative price was a blip in the grand scheme of things. The bigger thing was making the realization that prices could go negative. It sounds dumb, but a lot of models are sort of based on equity prices, so they are bounded by 0. That means we need to re think how to price put options if we are in a price environment near zero.

I know a couple of guys that blew up on that, but not as much as you'd think. Sort of surprising really.

First, thanks for the incredibly detailed answers in this thread. I've already learned a ton, and you clearly know what you're talking about.

I'm a data scientist/equity PM at a hedge fund, and what you described in the quoted section seems really automatable. Given hundreds of possible trades, each with EV estimates and VaR costs, you could pretty easily choose the optimal combination to maximize EV for a given VaR budget. The cross-correlation between trades might be tricky, but it's definitely solvable and then the whole thing basically boils down to the portfolio optimization problem. Do you use something like that already?

Can you share some examples of these?


I tried PM'ing you, but I guess your account is too new for me to do that. If you're interested in chatting about some inside HF baseball (culture, comp, etc.), please PM me from your main.

I think some of it can be. If you're looking to optimize some sort of skew points and things like that sure. The biggest issue you'll run into is that these type of scalpy skew trades usually take a while to monetize, and you're at the mercy of the market between now and then. The other issue is sizing. You can get small volumes off market maker algos on the screen no problem, but if you want to make decent money on these types of trades, you need size. Algos tend to back off pretty quickly unless you're filling an axe for them, so the best shot is to find another person who'll take the other side. Problem is nobody is an idiot, so they'll often skew the market against you. Trading vol is a lot about making pennies on the margins, so every bit of edge counts.

The other thing is that the biggest opportunities come from points in the curve where there aren't algos. Typically these will be further deferred (think 1+ year out). If some corporate is running a large hedging program, sometimes you'll see points on the skew dislocate because there simply isn't enough two way movement in the market to absorb their size. You can take the other side of these (usually trading against the bank that's trying to get out of the corp trade risk), but you need to be an actual human talking to an actual broker/bank to get this trade done. Obviously you can create a program that checks all the points in the skew and maybe looks at trades that have recently blocked to find opportunities, and then lean on those for these types of deals. This isn't going to be as competed as trading more liquid stuff in the front, but a lot of specialists in this market already do that as well.

I'm not naive enough to think that a lot of trading can be automated, and I expect that one day it will be. However, I think us humans still have a good 3-5 years at least before skynet makes us obsolete.



Sometimes when liquidity is at a premium you'll see stuff really dislocate. For example, on the negative price day, the front spread (the difference in price between the prompt and 2nd month contracts) got annihilated. However, it brought the rest of the curve down with it as people scrambled to sell anything they could. The second spread (the second vs third contract) traded down to like $-7 at the lows. Normally, it should be +/- 50c because of storage economics (the one day standard deviation nowadays is sub 3c).

The negative price event was a very specific issue for a very specific contract that was expiring on a specific date. The second spread shouldn't have been dragged down in a perfect world, but if everyone's selling price has got to give. Even if you had perfect foresight, and saw the second spread trading $-1.50, and thought "this is going to get back to at least -0.50 in a month, snap buy", you'd have to hold it while it went down below -$7. All of a sudden, to lock in a dollar you've given up $5.50 in a massive panic time, when liquidity is terrible (so you're paying through the nose just trying to get out) and it's very likely a risk manager, your boss, or your own discipline would have tapped you out for a loss well before everything normalized.


Happy to chat about this stuff, but I'd rather wait until my PMs work on this account. I'm hesitant to mix this with my main.

Can you run through a trade that moved against you, forcing you to get out at a 'bad' time? How much of your potential emotional range do you think you have explored?

Inside vs Outside your world would be a generalization about the status of people you/your coworkers associate with. 10 years out from undergrad, how much have social groups funneled?

I generally keep longer gamma strategies, so most big losses recently have been doing something like buying vol at historically cheap breakevens, and then watching as they decay and realized volatility stays at zero.

In general, it's sort of like poker where some of the best players are the best bankroll managers. In trading, being hyper aware of your risks and having a disciplined plan is the best way to trade. By consistently thinking about what can happen, and how to manage positions, you also subconsciously refine the way you think about markets. Having a plan on how to manage your risk is incredibly useful, because it allows you the freedom to trade, and not have to waste time and energy thinking about stop outs. Obviously nobody likes stopping out, but if you consistently apply them, it saves a lot of money in the long run.

Most people in the market (even people who have been there a few years or more) don't do this, and I think it's a massive leak. Trading on "feel" imo is a big long-term loser, and not having a idea of when to quit a trade is a recipe for disaster. For example, if you bought something for $10 because you thought it was fundamentally cheap, it's very hard to sell it for $8 when nothing has fundamentally changed. If anything, the trade looks more attractive! I don't trust my lizard brain to trade on feel, but if others think they can, more power to them.

I think discipline is really underrated as a skill. In poker, if you tilt at most you lose a buy-in, in trading it can be a lot worse.



In general, the people I mainly socialized with when I was 22-24 were through roommates (who were all working in finance). As a result, most of my friends from that time in my life were either in finance or friends (or friends of friends) from school. So, I mainly associated with people in finance, law school/big law, med school, and tech. I think now that we've all gotten a little older, I still mainly hang out with those connections, but have grown my personal network with people who have the same sorts of hobbies. I don't think it's all that different than most people who are around my age tbh.

I think I know a lot of people who were in the schools listed above from my year +/- a couple years who are in NY. In that respect, despite not going to one of the top Ivies, I still have had a decent chance to build a personal and professional network.

I think compared to friends who went on the investment banking route, my social connections are better, since my hours are regular and not super long. Unless there is some sort of big news story, I generally have Fridays and weekends free to socialize; very much in line with non-finance people.

One thing I think is actually fairly common in trading, especially after you've been there a while to funnel out the people who were there because they thought they had to be for a money/prestige perspective is that people don't really care much about "status." Like some guys spend lots of money on high end stuff, but a large percentage of them are still there because they genuinely like the job, and don't get satisfaction of spending the money. A significant number of friends I have with 7 figure net worths live in similar apartments they had from when they were like 24, and drive Honda accords instead of Maseratis. The other reason for that is that because traders are wired to think about value so often, it makes it harder to mentally justify luxury purchases.

I think more of my i-banker/PE friends care more about spending their money, or at least showing it off. I think part of it is that they have such little disposable time and such high incomes they feel the need to spend some of it to justify their jobs to themselves, but that's speculation.

Bank compensation is so poor relative to hedge fund compensation, you should be considering the move now at your level of experience. The amazing thing to me is how much it is widening too. I traded IRSwaps for 12 years at a bank averaging 7% of profit, moved to a hedge fund 17 years ago starting at 14%. Next year to stay competitive the firm I work for is paying more than 25%, meanwhile I see bankers are going to be disappointed this year...
There is usually no issues with hedge fund cross funding - no ‘lending had a bad year sorry that impacts you‘
Thinking about it?