When even "God" can't make it trading crude oil, you know times are tough.
Such was the news in early August when legendary crude oil trader Andy Hall announced the shuttering of his hedge fund Astenbeck Capital Management LLC, due to poor performance.
Hall (aka "God"), a longtime trader of oil, became well-known not only for the size of his bets, but also the supersized bonuses he occasionally received.
Certainly, for directional traders like Hall, crude oil has thus far in 2017 been "a riddle, wrapped inside a mystery," as Winston Churchill once famously described the Soviet Union.
Looking at a chart of crude oil prices this year, it's clear that one would have needed a functioning crystal ball to accurately predict where they were headed.
After starting 2017 well north of $50/barrel, West Texas Intermediate (WTI) crude oil slumped as low as $42/barrel in June. Boggling the mind even further, crude proceeded to rip higher during the month of July, and sat once again close to $50/barrel in early August, before sinking slightly lower.
With that type of unpredictable movement, it's fortunate directional bets aren't the only avenue traders can take when trading energy products. Filtering the energy sector for volatility ideas, like any other sector, is another option (excuse the pun) available to traders.
Before diving further into the volatility dimension of crude oil, it's important to highlight one interesting aspect to oil's recent pop.
While oil was getting hammered in May and June, many energy stocks and ETFs got battered alongside it. However, as oil prices rebounded in July, many of the same stocks and ETFs failed to bounce.
A recent episode of Options Jive provides insight into why that might be the case.
One reason outlined on the show is the fact that many of the stocks (and consequently ETFs) in the energy sector have exposure not only to crude oil, but also to natural gas.
And while oil may have rallied in recent weeks, the price of natural gas has dropped. It's the diverging nature of price movement in these two commodities which may be holding the sector back as a whole.
The chart below helps illustrate that while sector ETFs like XLE, XOP, and OIH are highly correlated to the price of crude oil, it's by no means a 1-to-1 relationship. Natural gas prices, and the general direction of equity markets (i.e. SPY), also influence the direction of energy stocks and ETFs, as shown below:
Per the correlation data above, one can see that securities in the energy sector are a bit more complicated than you might think. Like Jekyll and Hyde, the crude oil pricing environment is sometimes controlled by different forces.
On top of that, we appear to be stuck in a news cycle that alternates between two oversimplified narratives.
When oil prices are moving higher, mainstream financial media tells us that global stores of crude getting sucked down, and that the OPEC deal is working. When oil prices are sinking, the story shifts and we are told that American shales companies are flooding an already saturated market.
This is one of the many reasons that tastytraders rely on statistics-based metrics like Implied Volatility Rank (IVR), rather than a tug-of-war between journalists, when making trading decisions.
On the show, the hosts of Options Jive present a graph depicting the current IVR data of many well-known securities in the energy sector. If you are looking for new volatility-driven trading ideas, this episode is a great place to start.
The correlation data included on the show can also help ensure that traders have more complete knowledge of the product they are trading, and what makes it move.
We hope you’ll take the time to review the complete episode of Options Jive focusing on the energy sector when your schedule allows.
If you have any questions pertaining to this material, or any other trading-related topic, we hope you’ll leave a message below or reach out directly at firstname.lastname@example.org. Here at tastytrade, we live to talk trading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.