The oil market went through a tumultuous period in early 2020. The price of the West Texas Intermediate Blend hit a peak of over $60 per barrel and then plunged for the first time in history to a negative price for both the front-month futures contract and spot price at Cushing on 4/20/2020. This paper focuses on the apparent stability of the market during this time period and the financial engineering challenges that options and futures traders addressed to ensure the markets remained orderly and operating. The authors provide evidence that the market functioned normally in the face of a negative futures price and the listing of negative strike options. The paper specifically focuses on the difficulties in pricing and hedging of options under the traditional Black option model. The authors then explore two alternative model formulations and comment on their applicability.
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