Crude Oil Volatility Compression To Generate Short-Term Opportunity

In Blog by Michael Arnold

Since late 2014, throughout all of 2015 and the early part of 2016, high volatility in crude oil has been a given. In the last 10 years, the CBOE Crude Oil Volatility Index has only spent parts of 29 months above 47, and 14 of those months have been since December of 2014. So far, April has sent the entire month above 47, with a low of about 48.02 and a high (so far) of about 51.80. They key thing to note about volatility (“vol”) in general is that high vol implies current or expected price movement in excess of the norm. Traders tend to seek out markets with expanding volatility because price movement means opportunity, but options are different. A trader can make money in rising or falling vol in options and as has been written in this blog many time, Nadex binary options are in fact, options.

Option pricing is heavily influenced by the “Greeks”. Not the Greeks who fought the Trojans in mythology, but the Option Greeks. Mike Arnold states “Trading options without an understanding of the Greeks is synonymous to captaining a submarine without the ability to read instruments.” The Greeks are the essential risk measures and profit/loss guideposts in options strategies. They are Delta, Gamma, Theta, Vega and Rho. Each has a specific definition and each has a profound impact on option pricing including binary options (save for Rho, which has little effect on binaries specifically). When vol compresses or decreases, as may soon happen in crude oil, price movement slows and many traders think the trading opportunities are gone, but if you understand that Greeks, you know they are not gone, they have just shifted. You can take advantage of time decay and falling volatility and still make money. You can learn more about his here:

The Greeks control option pricing. Make it a point to understand the Greeks.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results