Schaeffer's Trading Floor Blog

The Volatility 'Surge' Facing the Oil Sector

Options volume has surged on oil ETFs, but does it matter?

by 6/20/2014 7:20 AM
Stocks quoted in this article:

With the CBOE Volatility Index (VIX) now under 11, and July 4 only a couple of weeks away, it's pretty safe to ignore the stock market for a couple weeks. Or so it seems.

But hey, there's certainly some interesting pockets out there, like energy for example. Bloomberg highlights some action in the United States Oil Fund LP (ETF) (NYSEARCA:USO):

Bullish options volume surged last week as the oil ETF jumped the most since December. More than 94,000 calls giving the right to buy the fund changed hands on June 12, the most since August and double puts, data compiled by Bloomberg show.

Contracts betting on a 10 percent rally in the ETF, known by its ticker symbol USO, cost 4.4 points more than puts to sell, according to one-month implied-volatility data compiled by Bloomberg. The price difference rose to 4.8 points on June 13, the highest since March 2011.

…The Chicago Board Options Exchange Crude Oil Volatility Index, tracking 30-day options on the USO, surged 19 percent to 17.28 since its record low on June 6 as the Iraqi army fought with the rebels and the U.S. considered a request for air support. The CBOE Volatility Index, or VIX (VIX), a measure of expected swings in the Standard & Poor's 500 Index, slid 1.1 percent to 10.61 since June 6.

It is important to note that volatility "surge" is off a floor, much like the VIX "Super Spike" that we're surely going to see any day now. Here's how USO volatility looks over the past half-year, versus the stock price:

USO Schaeffer's Volatility Index since December 2013

Volatility basically made new six-month lows and highs within a few days of each other. It's in the middle now, so really nothing exceptional to see here at this point.

Most interesting is that the volatility spike took place at the same time as the stock spike. If it was a regular stock, it would be somewhat counterintuitive, but since it's really a commodity, it's not that noteworthy of a divergence. Historically, gold and oil were portfolio hedges and a positive volatility correlation would look perfect normal. The relationship is a bit murkier these days. At some times, oil lifts might reflect a strengthening global economy. Other times, the surge itself can sink everything. Right now it looks like we're caught in the middle.

The surge into calls Bloomberg notes looks more like a trading spree than a move into longer-term positioning. Here's the put/call open interest ratio over the past half-year:

USO put_call ratio since December 2013

Calls came back briefly in the surge, but net-net, open interest remains relatively low. That's kind of odd given that calls are relatively expensive. It feels more like traders are raising offers as opposed to actually sitting short with too many. And I suppose that makes sense given the uncertainty in Iraq.

Obviously, the market as a whole doesn't care much at all about any of this. Even with a slow holiday stretch coming up, VIX wouldn't sit in the 10s with any remote fear. It suggests some risk out there that's not priced in. Whether that ultimately matters is another story, and we won't know the answer for a while.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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