The valuation and information content of options on crude-oil futures contracts

Using market prices for crude-oil futures options and the prices of their underlying futures contracts, we calibrate the volatility skew using the Merton (J Financ Econ 3:125–144, 1976) jump-diffusion option-pricing model. We demonstrate the jump-diffusion parameters bear a close relationship to concurrent economic, financial and geopolitical events. With each option’s implied-vol used to compute a Black–Scholes hedge ratio, the Merton model is contrasted to that Black–Scholes counterpart. The postulated Merton-style model is shown to yield useful parameters from which market prices can be computed, option prices can be marked-to-market and (imperfectly) hedged, as well as an informationally-rich structure covering the time period of the turbulent post-2007 time period.