Oil has Implied Volatility?
Most people that trade options successfully use some form of implied volatility measurement to make decisions about the trades that they want to make. I know implied volatility is almost always the first thing that I look at when I'm evaluation a potential trade.
As crude oil continued to decline below 70, and then below 60 I found myself thinking that I had missed the boat on being short oil. There is no real way to tell when the snap back will be, and with the implied volatility of the USO at a 5 year high, I have been using OVX to exercise my opinion on the movement of Crude oil. OVX is an index that uses the current VIX methodology as applied to the USO options chain. OVX options are European style, just like VIX and cannot be exercised early.
In last night's price action I noticed something curious. USO was down more than 4.5% but the price of OVX declined. Not that I'm any good at calling tops, but my opinion is that the downward velocity of USO price action is not surprising market participants any more, and that they are positioned for that velocity and that panic has peaked. My thesis is that even if USO falls further, that volatility as priced by OVX will roll off over the coming months.
I went out to February to give myself time to be right. I sold the 50 calls and bought the 55's to make a simple risk defined credit spread. I got about 25% the width of the $5 strike separation, or $1.25 credit.
I plan on using OVX quite a bit if successful with this credit spread. Perhaps by using ratio spreads or Broken wing Butterflies. I see a ton of potential for mean reversion income trades as these are once in 5 year levels in OVX. I will update here and on Twitter @B50cal1978
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Good Luck!
STT
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