It was only six years ago that financial professionals thought they had stumbled into the twilight zone when central banks first ushered in negative interest rates. Little did they know that in the not too distant future, the central banks' takeover of capital markets and the failure to price aggregate supply or demand would mean negative crude oil prices. Alas, in this bizarro world where a new 100-sigma event seems to take place every day, just one day later we now have options with negative strikes, just in case someone wishes to eviscerate the USO again next month, and the month after, and make a killing - metaphorically we hope - in the process.
In an advisory notice published late on Tuesday, the CME Group said that, effective April 22, the clearing house will switch its options pricing and valuation model for certain crude and energy products (i.e., oil) to Bachelier "to accommodate negative prices in the underlying futures and allow for listing of options contracts with negative strikes for the set of products specifies below."
The switch will be effective for the margin cycle run at the end of trading on April 22 and will remain in place until further notice.
In other words, so great was the demand from CME clients to issue negative strike options after Monday's fiasco, that it will now be a regular staple of the commodity market for the duration of the coronavirus-induced demand collapse, where every month at contract maturity we should now expect the price of oil to be "pinned" deep in negative territory.
It also begs the following philosophical question: does negative gamma on negative options strikes become... positive?
Full notice below (pdf link).