What a slow week and a half it has been. The major indices continue to make annual highs a few points at a time, which seems like daily. The volume is gone from the market but so is the fear, as measured by the VIX or volatility index. The same is true for oil, after breaking out above $90/bbl the daily range has gotten very narrow and with that the volatility has fallen off a cliff.
First lets take a look at the chart for crude:
First lets take notice of the HV, which is clocking in at 10.32, which represents at least a two year low. We have rallied some 25% off off the June lows and the fear has dissapeared. Looking at both the RSI and the bollinger bands we are either in overbought territory or we are almost there. The bollinger bands are beggining to narror and turn towards each other, indicating a larger move to come in the near future. The overbought/oversold indicators say the next move should be lower, but the 5 and 10 day moving average still indicate that the trend is higher with the 5 day trading above the 10 day moving average.
What about Implied Vol?
As of right now the best tool that I have to measure the implied volatility of oil is to use the OVX which is the CBOE crude volatility index based off the options of the USO. I did however recently read that the CME has released a new product based off of the futures contract and it will be under ticker symble OIV, which I will look at once it gets more established.
But as you can see in the above chart, we have certinaly hit a low in implied volatility and I expect that we could very easily pop back into the 30 to 35 range very easily.
How am I going to play this?
With volatility at these lows, buying premium looks very attactive to me. Which doesn't happen very often as I like to be a net premium seller. But with volatility low and mixed signals as to whether crude continues higher or lowere next...I like the idea of buying a Strangle. Since Feb crude is currently the prompt month with only 16 days left of trading in the options I decided that I wanted to use the March options to strangle crude at the 92.50 call strike and the 91.50 put strike, paying $6.70 for 10 lots.
Here is the trade at initiation:
Take note that the Mar crude contract was trading at 91.94 at the initiation of the trade.
As I said above, I believe that as we enter the new year that we will see a jump in implied volatility by 5 - 10%. Based on this assumption I used the analyze tab to increase vol by 5% and moved time out to next Friday and then 10% out to next Friday.
10% increase in vol and moved time out to next friday 1/7/2011
As far as the price slice selection, I chose the prices that I thought were the most likely targets based on the chart. My first set of targets are 90 on the downside and 94 on the upside and then 87 and 96.
First lets take a look at the chart for crude:
First lets take notice of the HV, which is clocking in at 10.32, which represents at least a two year low. We have rallied some 25% off off the June lows and the fear has dissapeared. Looking at both the RSI and the bollinger bands we are either in overbought territory or we are almost there. The bollinger bands are beggining to narror and turn towards each other, indicating a larger move to come in the near future. The overbought/oversold indicators say the next move should be lower, but the 5 and 10 day moving average still indicate that the trend is higher with the 5 day trading above the 10 day moving average.
What about Implied Vol?
As of right now the best tool that I have to measure the implied volatility of oil is to use the OVX which is the CBOE crude volatility index based off the options of the USO. I did however recently read that the CME has released a new product based off of the futures contract and it will be under ticker symble OIV, which I will look at once it gets more established.
But as you can see in the above chart, we have certinaly hit a low in implied volatility and I expect that we could very easily pop back into the 30 to 35 range very easily.
How am I going to play this?
With volatility at these lows, buying premium looks very attactive to me. Which doesn't happen very often as I like to be a net premium seller. But with volatility low and mixed signals as to whether crude continues higher or lowere next...I like the idea of buying a Strangle. Since Feb crude is currently the prompt month with only 16 days left of trading in the options I decided that I wanted to use the March options to strangle crude at the 92.50 call strike and the 91.50 put strike, paying $6.70 for 10 lots.
Here is the trade at initiation:
Take note that the Mar crude contract was trading at 91.94 at the initiation of the trade.
As I said above, I believe that as we enter the new year that we will see a jump in implied volatility by 5 - 10%. Based on this assumption I used the analyze tab to increase vol by 5% and moved time out to next Friday and then 10% out to next Friday.
5% increase in vol and moved time out to next friday 1/7/2011
10% increase in vol and moved time out to next friday 1/7/2011
As far as the price slice selection, I chose the prices that I thought were the most likely targets based on the chart. My first set of targets are 90 on the downside and 94 on the upside and then 87 and 96.
Additionally I also ran the same strategy based on the same price slices but with no increase in implied vol to see what I could expect, and below is what I found:
As of right now I only plan to have this on til next friday. So I am looking at a P&L of somewhere in the following range:
-7,000 to + 25,000
I will update this post next week.
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