US crude oil implied volatility
On October 12, 2017, US crude oil implied volatility was 23.8%, 4.8% below its 15-day average.
Often, US crude oil (USL) (UCO) (OIIL) prices and the implied volatility have an inverse relationship. For example, on February 11, 2016, when US crude oil active futures settled at their 12-year low, implied volatility spiked to 75.2%. Between February 11, 2016, and October 12, 2017, US crude oil prices recovered 93.1%. In fact, the implied volatility fell 68.4% over this period.
There is a 68% probability that US crude oil futures could close between $48.93 and $52.27 per barrel in the following seven days. To arrive at this price range, we assumed prices are normally distributed. Plus, oil’s implied volatility of 23.8% and a standard deviation of one was used in the calculation.
If US crude oil price rose to the $52 level, then it could push equity indexes such as the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) higher based on the relationship we have seen in part two of this series. Moreover, energy ETFs like the Fidelity MSCI Energy ETF (FENY) would be impacted by oil’s move among other ETFs as discussed in the previous part of this series.