The Week in Gold and Oil Volatility – 12/8 – 12/12

I recall when I totally ignored Oil in this space for gold, my how things have changed.   USO dropped over 12% last week which places the fund down about 38% in 2014. The result for OVX, as seen on the right side below, was a jump of 45% and a move near all-time highs. The front month December future, which settles on the open Wednesday morning, finished the week at a 2.72 point discount to the index, which indicates to me that a quick move down in OVX (and stabilization of oil prices) is not anticipated for early next week. GVZ moved below 20 as everyone paid attention to the oil market.

GVX OVZ Curve

I’ve never been an investigative journalist or played one on TV. However, I know (from TV dramas) that in order to find out what is really going on you need to ‘follow the money’.  This theory often leads me to looking at option trades as when someone puts on a position they are risking money based on an outlook. This led me to check into trading in USO options this past week to get a long term clue as to what traders may be thinking about the price of oil. Monday, when USO was trading around 24.00 someone came in and purchased some longer dated put options on the fund. The specific trade was a purchase of the USO Jul 21 Puts at 1.30. USO needs to drop from 24.00 to 19.70 or about 15% over the next seven months for this trade to result in a profit. However, as we all know, things got ugly for oil last week with USO finishing the week at 21.93. This put buyer is looking pretty and still has a ton of time for USO to continue to move lower. Also, checking quotes, the USO Jul 21 Puts were bid at 2.00 late Friday for a quick unrealized profit of 0.70.

USO PO