Oil’s implied volatility
Most of the time, oil prices and implied volatility move in opposite directions. For example, on February 11, 2016, US crude oil active futures were at their 12-year lowest closing price. On the same day, the implied volatility was 75.2%. Since then, the implied volatility fell 69.1%, and US crude oil active futures have more than doubled.
Assuming a normal distribution of prices, implied volatility of 23.2%, and a standard deviation of one, in the next seven days, US crude oil active futures could settle between $52.79 and $56.29 per barrel. The probability for this price range stood at 68%.
On November 2, 2017, US crude oil futures settled at $54.54 per barrel, the highest closing price in 2017. So, any further rise from this level could make a new 2017 highest closing price. Equity indexes like the S&P 500 Index (SPY) and the Dow Jones Industrial Average Index (DIA) stand to benefit from higher oil prices because oil is a growth-driven asset. In part two of this series, we discussed trailing week correlations between oil and these equity indexes.
The bullish sentiment around oil prices is also important for energy ETFs like the Fidelity MSCI Energy ETF (FENY) and others highlighted in part three of this series.