This is not your daddy’s oil volatility

Oil had a 10% move today, oil volatility a bit more

When I say this is not your daddy’s oil volatility don’t take offense.  I am talking about the old oil days, T Boone Pickens’s oil days, RIP, when a ripple in the global oil markets caused chaos and mayhem of unbelievable proportions. The thought of Saudi Arabia losing 50% of production is one of those unreal occurrences when risk guys tell their traders of 3 sigma events. It is supposed to be the “big one.”  What happened?

VIX is up .93, or near nothing after the weekend effect

I have the annoying habit of re-classifying macro issues as moves in VIX.  Trump Tweets Trade love, good for 2 pts down in VIX.  Trump Tweets Trade no-love, VIX up 2.  Saudis’ get bombed, VIX up 9!  My awesome internal VIX indicator is clearly in need of a recalibration because I am 8 handles off the move.  Something has changed in a big way.

US major supplier of oil is major oil volatility suppressor

My first week of trading as a pro was in early 1991 during the Gulf War 1.  I remember crude oil dropping $10 in one day or maybe it was more, when the US jumped the border with Saudi Arabia and Iraq.  Saudi Arabia was the big dog and now the USA is another big dog.  The market is pricing a supply disruption like it ain’t no thing.  The market may be right. And the old saw goes trade what you see.  I see that the VIX does not care, for now.

An oil volatility trade

big oil volatility as it goes on a 10% tear charts from Livevol by eenshot by Cboe Livevol

I think oil only moves, unless there is some retaliation, a few percentage points from here.  For the meantime, 1 x 2 put spreads for little dollars in USO Nov and beyond look pretty good selling the 11.5 recent low.  By Nov the Saudi’s will have the situation in hand or there will be a bloody mess.  You could take the 1 x 2 dollars and buy some VIX call spreads.  This was a student idea in the Pro Chat room and I liked it.  It is possible that all new volatility will be consumed in the TWTR-sphere only to peter out in the broader markets.  Today it looks like that but tomorrow it might not.

Disclosure: Positions in USO

Follow Andrew@optionvol You can hear Andrew on Option Block every week.

Follow Mark@optionpit You can hear Mark on Volatility Views every week.  Volatility View Crystal Ball is on Friday’s.

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