With Oil/Equity Correlation At Extreme, Hedge Risk With Spread Trade

As Bank of America Merrill Lynch commodity analysts predict “the conditions for a floor in crude oil prices are coming together,” expecting a recovery into the summer months with a $47 WTI crude forecast, auguring a bull case, a derivatives report notes opportunity. Such a rosy outlook also coalesces with another of their investment thesis prognostications from the derivatives team: The “Fed put” strike has shifted. This all occurs as price correlations between oil and equity markets are at an all-time high. In fact, the last time this occurred was prior to the 2008 financial crisis.

The "Fed put" has shifted its strike price

The “Fed put,”...