Friday, May 20, 2011

Crude Oil ETN (OIL) - Skew and Vol -- What's Next?

OIL is trading $25.19, down 2.2% with IV30™ down 3.4%. The LIVEVOL® Pro Summary is below.


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The investment is linked to the performance of the Goldman Sachs Crude Oil Return index and reflects the returns that are potentially available through an unleveraged investment in the futures contacts comprising the index plus the Treasury bill rate of interest that could be earned on funds committed to the trading of the underlying contracts.
Source: Yahoo! Finance

The ETF has some great skew and given the vol of late, I wanted to write about it. Let's start with order flow. The ETN has traded just under 6,000 contracts on total daily average option volume of just 1,602. Jun 28 calls show a lot of the action with over 3,400 traded in the first hour (ish) and the Sep 28 calls have traded over 2,000x. Both of these lines look like sales are the substantial order flow. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that there is an existing OI of over 2,800 in the Jun 28 calls. I believe that OI is long and it opened substantially on 5-18-2011 (i.e. two days ago) for ~$0.50. The sales today are at ~$0.30.

The Skew Tab snap (below) illustrates the vols by strike by month.

What a great skew. Commodities can tend to have a parabolic skew as the "norm," unlike most equities. OIL has the parabolic shape but there is a 'V' shaped dip on the 26 line which makes it quite interesting to you skew junkies (eh hem... me)... The OTM upside is more expenive (in vol) than the OTM downside, so the option market does reflect slightly higher upside risk than downside.

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

Oil has plummeted of late as have many commodities. There was that volatile period from 5-2-11 to 5-5-2011 when the ETN dropped about 13%. During that same period, the IV30™ popped ~ 5 vol points or ~15%. As of right now, the IV30™ (35.83) sits squarely in between the short-term historical vol (HV20 is 46.35) and the long-term historical vol (HV180 is 30.61). The HV60 is 36.38, so vol feels about fairish based on those measures.

Possible Trades to Analyze
1. Trade Jun skew:
The Jun 26 calls are priced at ~33.8 vol. The Jun 27, 28 and 29 calls are priced at ~38.4, 40.7 and 39.6 vol, respectively. Hypothetically the Jun 26/28 call spread can be bought for $0.40 yielding a 4:1 MaxGain:MaxLoss and selling ~7 vol points higher than purchased. That's just one example -- obviously, this carries a delta.

2. Other vol trades to examine:
The decision really comes down to betting on either that the short-term HV is elevated (and will decline) and therefore IV30™ may be pricey, or the opposite -- that we're in for more ragged moves in OIL and the implied is too cheap. I know, that last bit that was soooo helpful...

This is trade analysis, not a recommendation.

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