If you had to pick one underlying that perfectly represents the extreme volatility observed in financial markets throughout October/November 2018, crude oil would certainly be one of the top candidates.

After hitting 4-year highs earlier this Fall, oil prices plummeted in October, ending the month about 20% lower. And in November, things went from bad to worse.

Dropping like a lead balloon, West Texas Intermediate (WTI) experienced a slide of roughly 8% during a single session in November. That capped a string of consecutive losing days, setting the new all-time record at twelve in a row.

What made the selloff even more shocking was the fact that qualitative considerations seemed to support a more bullish case for oil heading into November.

After all, November 4th was the date that new sanctions were scheduled to be levied upon Iran. Sanctions that essentially represented a coordinated boycott of all oil exports from that Middle Eastern country.

Given that Iran had been exporting close to 2 million barrels of crude per day during the summer, the global supply chain was expected to experience a big shock when Iranian crude was no longer part of the equation.

The big surprise was that while the sanctions did in fact take affect on November 4th, it was apparently only in name, and not in spirit - at least not to the degree that had been indicated.

The big question leading up to the boycott was whether the largest buyers of Iranian oil (China, India, Turkey) would ultimately comply with US sanctions. A stoppage in purchases would mean those countries would have to fill their quotas elsewhere - driving up international competition for a resource that would theoretically be getting more scarce.

As it turned out, the sanctions on Iran (or lack thereof) served as yet another good example of how messy things can get when governments meddle in "free markets." If you doubt that assertion, look no further than the current trade war between the United States and Canada.  

In the case of oil, the rug got pulled out from the market at the 11th hour, when the Trump administration decided to issue last minute exemptions for some of the biggest importers of Iranian oil. The exemptions allowed eight countries to continue buying oil from Iran without the threat of penalty from the United States - which in turn meant that the sanctions were essentially all bark, and very little bite.

Suddenly, a market that was expected to be in short supply, was arguably oversupplied. As is often the case in such circumstances, market forces worked swiftly to "correct" the price to match the new market landscape.

Looking at a price chart, it’s easy to see the trail of tears, with WTI losing over $20/barrel in a matter of weeks. OPEC, caught off guard by the sudden turn of events, could only watch helplessly as their carefully-crafted market manipulation efforts were mown down like wheat by a scythe.

Looking at the chart of OVX, which is basically the VIX for crude oil, one can see that crude volatility experienced a super-spike in November. The OVX had been trading in range-bound fashion for almost a year - bouncing between 25 and 30 from October of 2017 through September of 2018. The metric would close almost twice as high in mid-November, breaking above 55.

The last time the OVX traded at such heights was the end of 2016, just before OPEC teamed up with Russia to synthetically drive prices higher through the aforementioned coordinated supply cut.

If you find the current price action in crude oil compelling, a new episode of Futures Measures is well worth a few moments of your time. On this installment, the hosts compare and contrast the pros and cons of trading a variety of different crude products in the current environment.

The hosts also outline a sample trade in crude oil using futures options, and explain how this approach may represent a better "pure play" on the commodity, as compared to stocks and ETFs.

We hope you'll take the time to review the complete episode of Futures Measures focusing on crude oil when your schedule allows. If you want to learn more about trading the OVX, we also recommend reviewing this previous installment of Market Measures.

Should you have any comments or questions on any of these topics, don’t hesitate to leave a message in the space below, or reach out directly to @tastytrade on Twitter or send an email to support@tastytrade.com .

We look forward to hearing from you!

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.

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