Crude oil implied volatility
Usually, oil prices and implied volatility move inversely. For example, US crude oil active futures fell 0.90% from August 3–10, 2017, while implied volatility rose 1.1%.
In one observation, US crude oil’s implied volatility rose to 75.2% on February 11, 2016. On that same day, US crude oil active futures fell to their 12-year low. Since then, oil prices have risen 85.4%, and implied volatility has fallen 63.7%.
With a 68.0% probability, US crude oil September futures could close between $46.75 and $50.43 per barrel in the next seven days based on normally distributed prices. Implied volatility was 27.3%, and the standard deviation was one.
If the current fall in oil prices continues, US crude oil prices could reach the $46 level. Crude oil at the $46 level could be important for equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). It’s also important for energy ETFs such as the Fidelity MSCI Energy ETF (FENY). In Parts 2 and 3 of this series, we saw that oil is important for equity indexes and energy ETFs.