US crude oil’s implied volatility
Oil prices and implied volatility are usually inversely related. On February 11, 2016, US crude oil active futures fell to a 12-year low closing, while the implied volatility was at 75.2%. Since then, the implied volatility has fallen 67.6%, while oil prices have risen 118.1%.
Oil prices in the next seven days
Based on the implied volatility of 24.4% and a standard deviation of one, US crude oil active futures could settle between $55.24 and $59.10 per barrel. The model is based on the assumption of a normal distribution of prices. The period for this price range is the next seven days with a probability of 68%.
On November 9, 2017, US crude oil active futures settled at $57.17 per barrel—4.7% below the $60 level.
Any upside in oil prices could be a positive development for the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA). We discussed their short-term relationship in Part 2 of this series.
Oil’s bullish sentiments could add gains to energy ETFs like the Fidelity MSCI Energy ETF (FENY) and other ETFs that we discussed in the previous part.