Oil IV Is Too Cheap
Bloomberg asked me to talk commodities today. While not my strong point, I know enough about grains and oil to have a decent discussion with about anyone. However, today was easy. Here is why:
When I was on the train coming into work, I was thinking to myself that OVX and its sister CVF have both had a bit of a rally. I was going to talk about how expensive options were getting in WTI and in USO. Then I sat down and looked at the actual vols close up. For starters, USO IV is not that high.
Livevol (r) www.livevol.com
You can see that we are at the upper edge of a normal IV. While 34 is a touch high, with a long term mean of 30%, it’s not like IVs are crazy high. Then I got a clean look at the relationship between HV and IV in USO, BZ, and CL. Below is USO:
Livevol (r) www.livevol.com
While IV is elevated historically, it is actually dirt cheap compared to how much Oil is actually moving right now. The 10 day HV is near 40%, the 20 day is higher than 34, even 30 day is getting near 30. If we consider that the VIX is trading at about a 50% premium to realized volatility, for WTI to be moving this much and for the OVX to be trading at a discount, shows how disjointed Oil movement and options prices currently are. Thus, while OVX and CVF are elevated, they are actually too low.
The Trade:
We think the combo of vol and skew presents some great bullish trades in CL. We also think it makes sense to be long volatility in USO. In fact, we would be looking to go long vol in just about any Oil contract. With an ATM straddle price of about 3.10 in the CL contract that expires in a week, we think it makes a lot of sense to go long ATM premium. If you have a directional opinion, the going long the options make a lot more sense than the futures contract.
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