The Option Pit VIX Traffic Light Is Green: Volatility is likely to go up or stay high.

Hey Traders,

Markets are up, VIX is down …

But more than the VIX, there is another vol measure I am watching today.

It may not be what you think of when you hear “volatility trade,” but there is an opportunity to trade volatility here nonetheless …

Here is what I am watching.

As you may know, there is the Cboe Volatility Index, or VIX, which measures the implied volatility (IV) of SPX options.

But there are other volatility measures, or VIXs, that look at specific market sectors, or even equities.

One of those is Cboe Crude Oil ETF Volatility Index (Ticker: OVX), which is the VIX of United States Oil Fund (Ticker: USO).

And while OVX has been spiking in recent months, right now the vol measure looks to be normalizing.

Meanwhile, realized volatility (RV) of oil is also falling off.

Take a look at the 20-day RV (blue) and 30-day RV (red) of USO …

So with implied vol (perceived future movement) and realized volatility (actually past movement) both falling off …

The risk of oil making a massive move in either direction also looks to be falling off, as well.

This is very bullish for oil names …

And points towards oil prices stabilizing.

Meanwhile, the Energy Select Sector SPDR Fund (Ticker: XLE) realized volatility is sky-high …

And while IV (red line) is elevated, RV (blue line) is more or less blowing it out of the water.

This creates an interesting opportunity for those looking to trade it …

I would be looking for cheap call options in oil names.

Your Only Option,

Mark Sebastian