Tech talk: Trading in dangerous times

September 19, 2008 09:21 AM

For a long time commodities in general and crude oil in particular seemed to go up every day. Crude oil had a parabolic rally for the first six months of the year. Of course the key to keeping those profits was to say “enough was enough.” Many funds and traders gave back substantial profits by not knowing when to get out. Was there any sign or indicator that showed it was time to sell?

How about the VIX? No not the stock market VIX, but the oil VIX. Many of you are familiar with how the VIX works on stocks. The oil VIX basically works the same way. The VIX will rise during times of financial stress and high volatility and will fall as the market becomes less fearful. VIX values greater than 30 are considered high fear and high volatility. Readings under 20 generally correspond to low fear and low volatility.

When the VIX index is high, around 40 or above, the market is close to reaching max fear and volatility and also is getting ready for a change.

This knowledge came in handy for those who watched the VIX on oil. Just after oil topped off at $147.27 on July 11, the VIX on oil hit a high of 53.88 on July 17. The oil VIX actually hit 50 for the first time ever on June 6, the day crude oil futures experienced their largest single-day rally ever (more than $11) and a sign that option traders were looking for an exit strategy. After all it is easier to take profits in a market still moving higher than one that has peaked. If traders had heeded this early warning sign, then many of those profits might have been saved.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.