<aside> ℹ️ About

This homework assignment will use arbitrage-goggles to show several dislocations that resulted from oil futures going negative

• It can be used as an interview question to test a junior or mid-level trader’s intuition about options </aside>

The Setup

You are a trader specializing in making markets in oil futures and related derivatives. Your tradeable universe includes:

• listed oil futures
• listed oil options
• an ETF that holds front-month oil futures (like USO)

1. The market closes. You observe the following facts:

![Untitled](<https://s3-us-west-2.amazonaws.com/secure.notion-static.com/3edb524d-cb3e-4986-9782-d5afa1f7018b/Untitled.png>)

The ETF share price closes at $6.00, in line with its NAV.

2. You walk into the office the next day. All of the prices and facts are unchanged. However you notice:

The 0-strike put on the futures is $1.00 bid!

You scratch your head. The zero strike put has a bid??

Understanding that markets don’t present free money so easily, you come to the most likely explanation — oil futures can go negative!

Now the fun begins.

The following questions will slowly help you identify what opportunities might exist. I’ve provided hints that become increasingly strong so if you want to challenge yourself don’t rush for help too soon.

Questions

<aside> 1️⃣ The oil future can go negative. What is the next question that immediately comes to mind (besides “why would a price go negative?”)

Answer

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<aside> 2️⃣ Identify the arbitrage.

• Hint #1
• Hint #2
• Hint #3

Answer

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<aside> 3️⃣ Given the answer, what needs to happen to close the arbitrage assuming the put continues to trade for $1?

Answer

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<aside> ⭐ Bonus Question

See inside

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