Oil was the headline grabbing market for the last few months of 2014. For months the price of oil has continued to violate any sort of support levels that technical analysts can come up with. January’s average OVX close was just over 55. This was the highest average for a month since the tail end of the Great Financial Crisis in April 2009. The chart below shows the average daily close by month for OVX since mid-2007 through January 2015.

OVX Avg Daily Close

The thing is, Oil has sort of vanished from the headlines. The price has sort of staggered in the mid to upper 40’s.   Despite being in a sort of a range the CBOE Oil ETF Volatility Index has remained at high levels. This second chart overlays OVX and crude oil futures prices from September 1st of last year through the end of January 2015. The trend to the downside appears to be slowing some.


So why is OVX still trading near recent highs even though some market participants think oil is reaching a bottom and others are not paying attention anymore. I did some digging and may have an answer. I took a look at where OVX closed on the last day of each month proceeding September through January. Then I calculated the annualized realized volatility for CL futures. The results appear in the table below –

CL vs OVX Table

Four of the five last months, OVX was lower that the realized volatility for that month. October’s numbers were basically in line with each other. OVX is nothing more than implied volatility which is the market’s prediction of what realized volatility will be in the future. In the case of OVX this is a 30 day forecast or one month and this forecast has been low more often than not recently. This may be price into the market until we have a month or two where realized volatility comes in lower than market expectations.