Oil Market Volatility Index Falls To 1-Year Low

By Gregory Meyer
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--As the stock market's "fear gauge" retreated this week, an important measure oil-market jumpiness fell to its lowest in a year.

The Chicago Board Options Exchange's crude-oil volatility index, or OVX, on Wednesday dropped to 40.74, its lowest since last May. The decline came after the more closely watched VIX volatility index, which tracks the prices for options on the Standard and Poor's 500-stock index, slid below 30 for the first time since last September's collapse of Lehman Brothers Holdings Inc.

Stock pickers say the VIX reflects market anxiety, and tends to rise when markets fall and fall when stocks turn around.

For the oil market, lower volatility doesn't necessarily carry the same bullish implications. Commodities, with their messy cycles of supply lagging demand or vice versa, are inherently more volatile than stocks. But the crude index's decline suggests traders collectively think huge price swings are a thing of the past, at least for the time being.

The OVX also isn't a perfect gauge of oil market sentiment, as it tracks options traded on the United States Oil Fund LP (USO), an exchange-traded fund, rather than futures themselves. Because the U.S. Oil Fund is traded like a stock, the OVX may pick up some cross-contamination from bigger trends in the equity markets.

Nevertheless, traders say the oil market has gotten a shade less wild, even with prices climbing back above $60 a barrel. OVX topped 100 in December.

"Nobody expects crude to go through the roof anytime soon," said Chris Thorpe, managing director at Hudson Capital Energy, a New York oil-options dealer.
Thorpe said trading in options on U.S. crude futures currently imply prices could rise or fall about 45% in the next year - well below last year's peak of more than 100% implied volatility.

On a daily basis, oil-options trading reflects expectations U.S. crude could move by nearly 3% daily, or about $1.70 a barrel at today's $61 oil price, said Harry Tchilinguirian, oil analyst at BNP Paribas in London.

Some traders are apparently still betting prices could again go haywire, even as glutted oil inventories and ample spare capacity among producers suggest otherwise.

Traders said that in the past couple of weeks, people have acquired options to buy crude at $250 and even $300 a barrel in future years, meaning they can book a profit if oil prices rise above those astronomical levels. On Thursday, they said, one such $250 call option for crude to be delivered in December 2010 sold for 15 cents a barrel.


-By Gregory Meyer, Dow Jones Newswires; 201-938-4377; greg.meyer@dowjones.com