Implied volatility on crude oil options has more than doubled in the last three months as uncertainty grows and traders’ attempts to establish a new equilibrium fails to establish a price floor.
Implied volatility on the December 2015 futures contract is running at 32.4% and compares to around 15% in September when the price of crude oil was hovering around $90.0 per barrel. Implied volatility, or the uncertainty surrounding the outlook for the contract, is a major input in the pricing of an option, and as oil prices fall that of crude oil futures options is doing the opposite in no uncertain terms.
Open interest has grown to 273 contracts at the $30.0 strike in the December 2015 contract, where growing volatility has boosted the option premium from a penny to around 45-cents. Each option covers 1,000 barrels of oil. Open interest at the $35.0 strike of 739 contracts is marked at a mid-price of 90-cents. The $40.0 strike put has attracted almost 1,700 lots in open interest with a mid-price on Tuesday of $1.56. Cautious oil bulls might consider taking advantage of the oil decline and boost to implied volatility by exploring credit put spreads. Both the 40/35 and 40/30 spreads expiring in a year’s time have shifted from around 5-cents one-month ago to 60-cents and $1.10 respectively.
Chart shows rising oil volatility