Last Week in Gold and Oil Volatility – 12/21/2014

Gold volatility represented by GVZ dropped 5% last week and the price of gold as represented by GLD was down 2.25%. Now on to what people care about these days –

The week over week price change for the United States Oil ETF (USO – 21.96) comes nowhere near telling the story from last week. From Friday to Friday USO was up 0.03 from 21.93 to 21.96. So why in the world is the OVX curve in backwardation and why was OVX up over 10% to close over 50.00 for the first time in over 3 years? Why, when I ask rhetorical questions do I automatically think of Aliens?

The reason for elevated OVX has to do with the path USO took last week. Twice last week, Tuesday and again on Thursday, USO was down over 6% for the week. That sort of price action will get traders on edge and that shows up in the term structure chart below.

GVZ OVX

At least one trader is expecting a rebound in the price of oil as represented by the performance of USO. Relatively early on Friday there was a trader who purchased over 10,000 USO Apr 26 Calls at 0.72 who also sold 10,000 Apr 30 Calls at 0.22 for a net cost of 0.50. To reach the maximum profit of 3.50 this trade needs to see USO gain 36% over a four month period.  I decided to look back four months and back in August USO was in the mid-30’s. Although it appears to be a pretty big move, relative to how the price of oil has moved lately and the market outlook based on the elevated levels of OVX it is not out of the realm of possibilities.

USO PO

The posts on this blog are opinions, not advice.
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