In April 2020, WTI crude oil futures settled at -$37.63 per barrel. Financial traders who assumed the option Greeks told the full story discovered there was a physical dimension to crude options that their models had never been asked to price. The lesson was expensive and specific: near expiry, crude oil options are not options on a financial price. They are options on physical crude at a specific location, with storage and transportation costs that can dominate the financial value.
The Cushing Constraint and What It Means for Options
WTI crude oil futures on CME settle against physical delivery at Cushing, Oklahoma. Cushing is a landlocked storage hub with finite tank capacity. As of 2024, total working storage at Cushing is approximately 76 million barrels. When storage fills — as it approached in spring 2020 — the cost of taking delivery of physical crude spikes because there is nowhere to put it.
For a financial trader holding a WTI call option near expiry at a strike of $10 when the screen price is $12, the option appears to have $2 of intrinsic value. But exercising the option means buying physical crude at Cushing for $10 per barrel. If storage is unavailable and the next available delivery window is three weeks away, the real cost of owning that crude for three weeks — storage, pipeline fees, quality adjustments — could be $4 per barrel. The option that appears to be in the money is actually worth less than zero to a buyer who cannot handle physical delivery.
Standard Black-76 Greeks capture none of this. Delta says the option should go up $0.70 for every $1 rise in the WTI price. But if the WTI price is rising because physical storage is tightening, the option's real value to a non-physical trader may be declining. The financial Greeks and the economic Greeks diverge when physical delivery constraints are active.
Brent Options: Different but Related Problem
ICE Brent crude options are cash-settled against the ICE Brent Index, which is itself an average of physical traded cargoes in the North Sea. The physical settlement mechanism is less direct than WTI — there is no single delivery point, and the settlement price averages over multiple days and multiple grades. This reduces the sharp delivery squeeze risk at expiry but introduces a different risk: the ICE Brent Index can diverge from the futures price by $0.50–$1.50 in active physical markets, and that divergence is not captured by the futures-based vol surface.
Traders who use Brent options to hedge physical cargo exposure face basis risk between the option settlement price and the physical cargo price they are actually exposed to. This basis — sometimes called EFP basis, after the Exchange for Physical mechanism — can widen dramatically during periods when North Sea production is disrupted or when refinery demand for specific crude grades spikes. Quantifying this basis risk requires data on physical crude trading that most options pricing systems do not have access to.
Asian (Average Price) Options: The Dominant Structure
Most crude oil options traded in the OTC market — and a growing share of exchange-traded volume — are Asian options that settle against the average of daily settlement prices over the contract month rather than the final settlement price. Asian options are specifically designed to reduce delivery squeeze risk and final-day price manipulation risk. For a buyer of an Asian call, the payoff is based on the average price over 20 trading days, so a single-day price spike or crash has limited effect on the final settlement.
Asian options price at a discount to equivalent European options because averaging reduces vol. The discount is approximately 30% for a one-month contract, using the well-known square root of time approximation. But the exact discount depends on the autocorrelation structure of daily crude prices — if crude prices are strongly trending, averaging reduces vol less than the simple approximation suggests. If crude prices are mean-reverting (typical of spreads and basis), averaging reduces vol more.
Allasso prices Asian options using a Monte Carlo simulation with full correlation structure across daily prices within the averaging period. For crude oil, the daily return autocorrelation varies from near-zero in quiet markets to -0.15 in trending markets, and the Asian option discount varies accordingly. The difference between the simple approximation and the simulation-based price is typically $0.15–$0.40 per barrel for one-month at-the-money Asian options — material on any significant book.
The Roll Risk: When Options Expire and Futures Roll
WTI futures options expire approximately three business days before the underlying futures contract expires. This means options traders must be aware of two expiry dates: the option expiry (when exercise decisions must be made) and the futures expiry (when the underlying futures contract settles). In the three days between these dates, an exercised call option becomes a long futures position that is approaching physical delivery.
This three-day gap is where delivery logistics risk concentrates. A trader who exercises a call option three days before futures expiry may find that rolling the resulting long futures position to the next month is expensive — the roll cost (the spread between front-month and next-month futures, the contango or backwardation at that point) can be larger than expected if other traders are simultaneously rolling their positions. In a large open interest environment, the roll cost can be $0.30–$0.80 per barrel, which is a significant fraction of typical option premiums for options struck near the money.
Allasso tracks the futures roll calendar for all exchange-traded commodity futures and adjusts option expiry calculations accordingly. For desks that are not set up to take physical delivery, the system flags positions approaching the three-day delivery window and alerts the risk manager to manage the exercise decision and roll explicitly rather than letting it happen automatically.
Quality Differentials and Grade Basis
WTI futures specify delivery of crude meeting certain quality parameters at Cushing. The grade basis — the price difference between WTI futures and the physical crude grades actually traded in the cash market — introduces another layer of risk that options Greeks ignore. Eagle Ford Condensate, Permian WTI, and Canadian blended crudes all trade at different differentials to the futures price, and these differentials change with refinery demand, pipeline constraints, and seasonal crude quality requirements.
A commodity trader who has physical exposure to Eagle Ford crude and is hedging with WTI options faces a grade basis that averages $2–$4 per barrel discount to WTI and can widen to $6–$8 per barrel when Gulf Coast refineries shift to heavier crude processing. The options hedge is only as good as the correlation between Eagle Ford physical prices and WTI futures prices. In normal markets, that correlation is above 0.95. During pipeline constraint events, it drops to 0.70 or below.
Allasso tracks grade basis time series for major US and international crude grades and quantifies the residual basis risk in options hedges. The platform allows traders to specify their actual physical crude grade and compute the effective hedge ratio and residual basis risk rather than assuming WTI futures hedge the physical exposure one-for-one.
Measuring and Managing Delivery Risk in Allasso
Allasso introduced a delivery risk module in its platform specifically to address the physical dimension of commodity options. For crude oil positions within 15 days of expiry, the module computes three additional risk measures that supplement the standard Greeks.
First, delivery proximity score: a normalized measure from 0 to 100 indicating how close the position is to physical delivery risk. The score rises as expiry approaches and as open interest in the contract increases (higher open interest means larger price moves to clear the delivery book). A score above 75 triggers a delivery risk alert in the risk management dashboard.
Second, estimated roll cost: the model-estimated cost of rolling the position to the next monthly contract, based on current futures term structure and the implied roll cost observed in comparable historical periods. This allows the desk to budget for roll costs in the P&L before they occur.
Third, storage constraint indicator: a daily estimate of Cushing utilization for WTI and equivalent storage utilization for other major exchange delivery points. When storage utilization exceeds 85%, historical data shows that delivery risk premiums in options prices rise sharply. The indicator allows the desk to proactively reduce delta exposure before delivery constraints become acute.
Together, these three measures give crude oil options traders a physical-delivery-aware risk picture that standard Greeks cannot provide. Book a demo with our team to see how the delivery risk module works on WTI and Brent positions specific to your book.