Implied volatility and prices
On March 1, 2018, US crude oil’s implied volatility was at 23.7%—0.4% below its 15-day average.
As you can see in the above chart, there’s often divergence in oil prices and their implied volatility. Since US crude oil fell to its 12-year low in February 2016, the implied volatility fell 68.5%. US crude oil active futures gained 132.7% during this period.
On March 2–8, 2018, at 68% probability, US crude oil futures could close at $58.99–$62.99 per barrel. The price range assumes that oil prices are normally distributed as well as oil’s implied volatility of 23.7%.
On March 1, 2018, US crude oil futures settled at $60.99 per barrel. If oil falls below the $60 level, according to the price range we obtained above, then investors in ETFs like the United States Oil ETF (USO), the ProShares Ultra Bloomberg Crude Oil (UCO), the United States 12 Month Oil (USL), and the PowerShares DB Oil ETF (DBO) could be in trouble. In the seven calendar days to March 1, US crude oil prices fell 2.8%. These ETFs’ performances during this period were:
- USO fell 1.9%
- UCO fell 3.9%
- USL fell 1.9%
- DBO fell 1.5%