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Is Crude Oil More Volatile Than Stocks? Check Out the OVX Index by Matt Moran

by Administrator on 02-16-2012 09:04 AM

The CBOE Volatility Index® (VIX®) has become so well known that for many investors the VIX is the primary barometer or virtual proxy for volatility.  The VIX is designed reflect market expectations of 30-day implied volatility conveyed by S&P 500 stock index option prices. www.cboe.com/VIX

 

In recent years I often have heard the following questions --

  1. Are there other indexes that use the VIX methodology to create implied volatility indexes for options on other asset classes and other stock indexes?
  2. How does the volatility of the S&P 500® Index compare to the volatility of other asset classes?

The answer to question number 1 above is that there now are dozens of indexes worldwide that are legally authorized to use the proprietary VIX methodology (for a sampling of some volatility indexes created by CBOE, including the CBOE Crude Oil ETF Volatility Index (OVX), please visit www.cboe.com/volatility).

 

For the remainder of this blog, I will focus primarily on the volatility of two very important indicators – the S&P 500 Index and the dollar price per barrel of WTI crude oil. 

 

An answer to question number 2 above is that crude oil prices often have been much more volatile than the S&P 500 Index.

 

CRUDE OIL SPOT PRICES

 

As one can see n the first chart below, the prices for crude oil have had dramatic swings over the past 6 years.

 

 

30-DAY HISTORIC VOLATILITY

 

If an analyst prefers a longer time frame over which to view volatility, the use of historic volatility of commodity spot prices could be preferable (options on commodity-based ETFs were not available in the 20th century).

 

The 30-day historic volatility for crude oil peaked at over 125 in January 2009, but it has fallen to around 20 this month.

 

 

Here is the average 30-day historic volatility since January 1993 for three key barometers --

 

  • 36.5    Crude oil spot (WTI)
  • 17.0    S&P 500 Index         
  • 14.9    Gold spot                 

 

The 30-day historic volatility for the USO ETF peaked at around 88 in December 2009.

 

 

The approximate average 30-day historic volatility for six ETFs over the past 5 years was --

 

41.7          EWZ - iShares MSCI Brazil Index ETF

49.3          FXI - iShares FTSE China 25 Index ETF

36.5          USO - US Oil Fund ETF

43.8          EEM - iShares MSCI Emerging Markets Index ETF

21.0          GLD - SPDR Gold Trust ETF

22.7          SPY - SPDR 500

 

 

30-DAY IMPLIED VOLATILITY

 

Some analysts prefer to look at real-time updates of implied volatility indexes that are designed to reflect intraday customer sentiment.

 

The CBOE Crude Oil ETF Volatility Index (OVX) has a price history back to May 2007, and its peak daily close was 100.42 on December 11, 2008. The OVX Index is designed to reflect the 30-day implied volatility of USO ETF options www.cboe.com/OVX

 

 

The average daily closing values from May 10, 2007 through February 14, 2012 were –

 

41.9    CBOE Crude Oil ETF Volatility Index (OVX)

26.5    CBOE Volatility Index (VIX)

 

 

 

CORRELATIONS

 

As noted in the table below, the daily changes in the OVX Index had a negative 0.73 correlation to those of the USO ETF during the time period covered.

 

 

There were three days in August 2011 in which the USO ETF fell by more than 6% and the OVX Index rose by more than 26%.

 

 

TRADABILITY AND FUTURES AND OPTIONS

 

Some CBOE customers have expressed an interest in a future launch of OVX futures and options.  Please check www.cboe.com/OVX for an update on the status of possible OVX futures and options.

 

If OVX futures and options are launched in the future, and if you believe that the OVX is mean-reverting and you believe that there is a good chance that OVX might rise significantly in upcoming weeks or months, four strategies that you might consider include –

 

  1. Long OVX call options
  2. Long OVX call spreads
  3. Short OVX put credit spreads
  4. Long OVX futures.

Before investing in any volatility-based product (futures, options, or ETP), please do your homework regarding the unique pricing of volatility-based products.  You can visit www.cboe.com/VIX for some information regarding pricing, and www.cboe.com/OVX for more information on the OVX Index.

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About the Author
  • Mr. Bittman is the author of two books, Options for the Stock Investor, (McGraw-Hill, 1996), and Trading Index Options (McGraw-Hill, 1998). He teaches courses for public and institutional investors, and he has presented several custom courses throughout the U.S., Europe, South America and Southeast Asia. In 1980 Mr. Bittman began his trading career as an equity options market maker at the Chicago Board Options Exchange. From 1983 to 1993, he was a Commodity Options Member of the Chicago Board of Trade where he traded options on financial futures and agricultural futures. Mr. Bittman received a BA, magna cum laude, from Amherst College in 1972 and an MBA from Harvard University in 1974. In addition to his responsibilities at The Options Institute, Mr. Bittman is also a member of the faculty of The Illinois Institute of Technology, where he teaches in the masters level Financial Markets and Trading Program.
  • Mr. Kearney began his long association with the CBOE when he became an independent Market Maker in early 1981. Mr. Kearney traded options full time on the trading floor until 1992 and periodically thereafter until 1996. In early 1992 he became a founding partner and Registered Options Principal of a brokerage firm based in Chicago, a member firm of the CBOE. Mr. Kearney’s responsibilities included development and implementation of hedging and trading strategies using listed options for their institutional clients as well as their retail investors. Mr. Kearney is the co-author of Understanding LEAPS®, published by McGraw-Hill, September 2002. He has been a regular contributor to many news services including Reuters, Derivatives Week, BARRON’S, CNBC, Bloomberg, Group W, The CBS Radio Network, FORTUNE, Ticker Magazine, Stock Futures and Options, BBC TV and Radio, NPR, and others. Mr. Kearney served on various committees at the CBOE, including the Arbitration Committee from 1984 to 1996. Prior to joining the CBOE Mr. Kearney was a marketing director for NCR Corporation. Mr. Kearney is a graduate of St. Mary’s University (MN), BS, 1971, and pursued his MBA at Lake Forest Graduate School of Management. In 2006 he completed a 3-year SII/SIA program at the Wharton School of the University of Pennsylvania.
  • Peter B. Lusk is an instructor at the Options Institute, the educational arm of the Chicago Board Options Exchange. He teaches option courses for public and institutional traders and has contributed educational type articles to various financial publications. Peter has spoken to thousands of investors across North America the past few years including over 200 webinars for the CBOE and member firms on trading options. He can also be seen each week on CBOE-TV with his show, Strategy of the Week. In addition to his responsibilities at the Options Institute, Peter serves as an Instructor for the Options Industry Council – an organization representing the options industry in the U.S. Prior to working at the Options Institute, Peter was a highly successful market maker for many years on the floor of the CBOE trading equity options. He was also involved in options training for new market makers at Lakota Trading in Chicago. As a professional trader, Peter enjoys sharing his knowledge of proven option strategies and risk management at the Options Institute.
  • Russell Rhoads, CFA, is an instructor with the Options Institute at the Chicago Board Options Exchange. He joined the Institute in 2008 after a career as an investment analyst and trader with a variety of firms including Highland Capital Management, Caldwell & Orkin Investment Counsel, TradeLink Securities and Millenium Management. He is a financial author and editor having contributed to multiple magazines and edited several books for Wiley publishing. In 2008 he wrote Candlestick Charting For Dummies. Since joining the Options Institute he authored Option Spread Trading: A Comprehensive Guide to Strategies and Tactics which was released in January 2011 and recently finished work on Trading VIX Derivatives: Trading and Hedging Strategies Using VIX Futures, Options, and Exchange Traded Notes which was published in August 2011. In addition to his duties for the CBOE, he instructs a graduate level options course at the University of Illinois – Chicago and acts as an instructor for the Options Industry Council. He is a double graduate of the University of Memphis with a BBA ('92) and an MS ('94) in Finance and also received a Master's Certificate in Financial Engineering from the Illinois Institute of Technology in 2003.
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