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Crude Oil Volatility | An Opportunity To Sell Premium

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Crude Oil Futures futures have experienced an approximate 50% decrease over the past 6 months. Over the same period, the Crude Oil Implied Volatility (IV) Index, OVX, has risen significantly.

We know that downside movements in equities generally leads to a rise in IV because the perceived risk is to the downside. Is this relationship true for Crude Oil as well?

Crude Oil IV tends to be very volatile, with historically larger decreases than increases in each year. A table of the 30-day periods in OVX from 2007 to present was displayed. The table included the median decrease, largest decrease, median increase and largest increase for each year. Historical movements suggest a normalization after the large increase we have seen this year.

A graph of the Crude Oil returns since 2000 was displayed. The graph showed that over the last year, returns in Crude Oil have been more skewed to the downside and there have been more outlier moves than what we've seen over the past 10 years. Both premium and realized volatility are high. This provides an opportunity to sell options. Even without a volatility contraction, a short option position will benefit from higher theta values.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of Crude Oil Volatility.