One of the most liquid and most traded futures contracts among traders worldwide is the WTI Light Sweet Crude Oil Future (abbreviation CL). In addition to futures contracts with monthly expiry, a range of other products are available for trading oil. Among the exchange-traded products (ETPs), the United States Oil Fund (abbreviation: USO) has made a name for itself as an "oil ETF". There are also Options to the Futures (CL) as well as on the USO, and it is therefore also possible to calculate a volatility index from the option prices.
The OVX is a Volatility indexcalculated from the option prices of the United States Oil Fund (USO) and is followed by option traders, futures traders and analysts alike. In this article, you will learn what exactly the OVX is, what value it adds and how the volatility index can be used for analysis.
What is the OVX?
The Cboe Crude Oil ETF Volatility Index (briefly: OVX, due to the ticker symbol) measures the market's expected short-term Fluctuation range (implied volatility) of oil prices. The same method is used to calculate the VIX and the option prices of the United States Oil Fund (USO) are used to calculate the index.
United States Oil Fund (USO)
The United States Oil Fund ETF with the abbreviation USO was launched on April 10, 2006, with the objective of Oil price by buying forward contracts (futures) on crude oil (WTI) and rolling them continuously. For this reason, rolling losses occur, which is why a long-term investment in the USO does not appear to make much sense. On the other hand, the USO is very popular for short-term trading, or for medium- to longer-term short trades. Options on the USO are also very liquid tradable.
Interpretation and analysis of the OVX
The OVX is also called "Oil VIX" and can be a useful tool in trading and analyzing crude oil, just like the VIX.
A Increase in OVX indicates a high expected range of fluctuation (implied volatility) of oil prices, a declining OVX on the other hand, is a sign of a low expected fluctuation range.
However, there is an important difference in the relationship between OVX and oil prices compared to the VIX and the S&P 500:
Since in the equity markets market participants mainly hedge against falling prices and the VIX rises accordingly when the equity markets record price losses, in the commodity markets a Need for hedging against falling as well as rising prices prevail, depending on the respective raw material and the current market conditions.
If one analyzes the relationship between the oil price and volatility or the OVX in more detail, it is noticeable that, particularly in recent years, an increase in volatility has usually been accompanied by falling oil prices. However, should a strong bull market in oil arise again in the future (such as in 2007/2008) and a greater need for hedging against rising prices arise, it is to be expected that the OVX can or will also rise with rising oil prices.