Blue Lacy Advisors, LLC - End of November Crude Oil Market Commentary
Minneapolis, MN | November 29, 2022 | By: Steve Sinos, Blue Lacy Advisors, LLC
Oil bulls are twisting themselves into pretzels trying to understand how Brent’s and WTI’s prompt contracts can be off by ~10% week over week. Here is a simplified summary of the framework I worked through with a client this week:
First, as we have discussed regularly, extreme volatility is priced into the market. Implied volatility ended the week ~50 on an annualized basis. Reducing this to a weekly number suggests a weekly range of +/-7%. Chai’s model prices in similar volatility, previously projecting that Brent would trade ~89-104 last week. Oil exceeded these estimates, but not by an extraordinary amount. The lesson? In a high-volatility market, be prepared for price movements to exceed expectations. Models are flawed because they fail to price volatility jumps; we consistently look at options skews and Out-of-the-Money (“OTM”) options volumes to understand how traders manage that risk. OTM call skews have been trading at premiums to At-the-Money (“ATM”) options. That has subsided for all but deep OTM calls. The tails, like the 10-delta call, trade at modest premiums, representing options that are ~$10+OTM, which is beyond the range described above and representative of a volatility hedge.
*This summary is based off November 20, 2022
A free excerpt, such as this one, will be published on a delay periodically. This is an excerpt from Blue Lacy Advisors, LLC's (“Blue Lacy”) weekly commentary for clients, which is based on a collection of models, research/analytical subscriptions, and bespoke work. Each week Blue Lacy explores how market drivers included in these analyses might affect or be used in clients' planning, budgeting, and execution of strategy. Call Blue Lacy to make an appointment today!
Meet the Author!
Steve has spent his career in strategy, risk, trading, and investment. He works with investors to source investments in opportunistic or high growth sectors, with particular interest in early-stage companies solving clearly defined problems.
He is currently a Managing Partner with Blue Lacy Advisors LLC, giving management teams and investors confidence in their decision making by supporting strategic planning and execution, risk management, commodity trading, and market analysis.
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