So, this OVX index. What’s it all about?
According to the CBOE, which launched the so-called Oil Volatility Index on Tuesday:
The OVX, or “Oil VIX,” measures the market’s expectation of 30-day volatility of crude oil prices by applying the well-known CBOE Volatility Index (VIX) methodology to options on the United States Oil Fund, LP (ticker symbol USO), spanning a wide range of strike prices.
But Nathan Hagens, Editor of The Oil Drum, thinks the OVX is also a sign that oil has topped:
The mere fact that an oil VIX was announced means probably a short term top in the oil market. People use the [stock] VIX to gauge bearish sentiment and the creation of the OVX means lots of people are paying attention to crude oil (though they don’t yet internalize the broader issues underlying its rise).
Jon Najarian of OptionMONSTER.com agrees, although he is skeptical of the index’s appeal to the retail investor:
The more focus comes onto a sector, oil to the good or financial stocks to the bad, the more the hair goes up on the backs of the necks of the money managers in those vehicles.
Retail investors will most probably not use until and unless the volumes drive them into the oil volatility trade. Most will still focus on crude and USO, XLE instead. But the professional traders may use the vol index for oil to hedge and the more they use it the more likely it will attract individual traders
The initial lack of interest in the OVX - which has not yet begun to trade - is also unlikely to influence volatility, according to Najarian. Which is not to say oil prices won’t continue to be volatile:
The recent two big selloffs in crude have dented the armor of the crude bulls. I see the real volatility spike as Crude wrestles with a 20 percent correction, which would be around $120 per bbl. That would bring the spike in vol with speculation either by the bulls for a bounce in crude, or the bears for a break. It has just been too easy to be long until these latest moves, thus I think volatility will pick up, not cool down.
Related links:
CBOE OVX microsite - CBOE
The only way is down (for oil output) - The Economist
