The Story Of Black Gold (USO)
Tyler Craig: The recent story of oil has been quite one-sided to say the least. What began as a humble counter-trend retracement quickly grew into a bullish beast swiftly overcoming any potential barriers laid in its path. The declining 20 day moving average was overcome with ease. The 50 day put up a bit more of a fight, but caved following a four day skirmish. The all-powerful 200 day moving average bested the bulls for a full nine days before hoisting up the white flag. And, with today’s launch, the psychologically important century mark has now fallen victim to the relentless bull that is dominating the oil market.
All told, black gold is up an impressive 36% from its early October lows. Given the virtually uninterrupted rise and arguably overbought levels, might one make the case for some type of contrarian play here? Perhaps – though I think it unwise to be the first one aboard the contrarian train when nary a sign of weakness currently exists.
What of the options mart? Any sign of an increase in speculative activity which may provide corroborating evidence that things are getting too frothy in the oil patch? Well, if we use implied volatility of options on the United States Oil Fund (NYSEARCA:USO), then, no, not so much. A look at the OVX below reveals implied vol is decisively lower today than at the beginning of October (41 vs. 60). One item of note is that realized volatility is also down noticeably over the same time frame, so USO is moving much less nowadays thereby justifying lower IV levels. I would also point out that 41% is still high compared to both recent historical vol (21 day HV is 28%) and compared to the range USO IV usually trades in.
The key takeaway, then, is the lack of a noticeable rise in IV concurrent with this run in crude isn’t so much a lack of increased speculation in oil as much as it is a function of volatility expectations being at such lofty levels already in October when this whole bullish oil run began.
Tyler Craig, author of Tyler’s Trading and owner of TC Trading, Inc. Over the years I’ve educated hundreds of traders through my work with one of the nation’s leading educational firms. I enjoy writing and am a current monthly contributor to the Wealth Intelligence Magazine. My writings have also been featured in Expiring Monthly and frequently show up in the Abnormal Returns Options Newsletter. In 2009 I started Tyler’s Trading to share daily market commentary on stocks and options.