To say that the current trading environment is erratic is an understatement. The ever-changing geopolitical and geoeconomic landscape entails an unpredictable future, which understandably makes investors anxious. Uncertain prospects are neatly mirrored in volatile price movements. Yet, what is curious to observe is that the daily volatility of the major oil futures contracts remains comparatively low. Taking the flagship CME Group Crude Oil futures contract, WTI as an example, the year-to-date volatility is around 24% versus the average of 28% observed in 2024.
So, is it misplaced to label the oil market as volatile and erratic? It is not because the headline-trading attitude that has characterized the last two or three months has discernibly affected intra-day price movements. It is currently much more vicious and volatile than for the better part of last year.
A riskier trading environment requires an adjustment in approach to trading. These changes are exhibited in several aspects of the oil market. Firstly, while the average daily volume (ADV) in WTI shows a healthy annual rise year-to-date (16%), market players are more inclined to use options as a trading tool. ADV in WTI options has registered an annual ascent of 33% to date. Secondly, the nervousness of market players is also echoed in higher implied volatility, which, at around 30% for at-the-money options, is meaningfully above historical volatility. Curiously, implied volatility rises when the strike price is lowered insinuating downside price risk. This view is confirmed by the overwhelming popularity of put options as displayed in the chart above.
The graph clearly illustrates the struggle to make significant price advances in recent months. It is coupled with an elevated put/call ratio, which can then be used as a reliable indicator for any potential reversal of investors’ sentiment. The U.S. crude oil benchmark, which shed 15% of its value since mid-January, has started to pick up lately. At the time of this writing, it is some 5% above the recent low while volatility and the put/call ratio are broadly stagnant. Protracted price recovery is only anticipated when implied volatility retreats together with trading volumes in put options in comparison to calls.
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
