SPX futures are up over 1% to 1936.75 and crude oil is rallying back by about 1.5%. The cash VIX finished 24.30 yesterday after a fairly wild ride in the S&P 500, which finished positive on the day. The VIX futures are all lower this morning given the positive equity tone.
Another day another new low for crude oil? One thing is certain, levels of implied volatility in the options of crude have reached its highest levels since 2009. The economic slowdown in China and a glut of reserves globally seem to be the driver of the sell off in crude and the ensuing volatility. The former PIMCO co-CEO, Mohamed El-Erian, believes we may simply be “repricing to a new volatility paradigm.” Robert McNally of Columbia University delivered a paper last month, “Welcome Back to Boom-Bust Oil Prices”. In it he states, “Oil’s short run demand and supply inelasticity portends to prolonged boom-bust cycles. The absence of an effective short-term price stabilizer will increase investor uncertainty about longer-term prices… As we see daily now, global equity, bond and currency markets are being roiled by violent oil price moves; oil is the tail that is wagging several macroeconomic and financial dogs.”
In any event, the CBOE Oil ETF VIX Index (OVX) has reached 63 which hasn’t been seen since the financial crisis. What’s interesting is that 1-month realized volatility in crude is only 40%. In other words, the gap between expected (implied) volatility and realized volatility is very wide. So wide in fact that the spread sits in the top 2% of readings over the last decade. Additionally, one-month realized volatility rarely breaks 60%. It has only done so twice since 2009 and seems very rich in my estimation. Perhaps we are near the lows in crude, finally.