What will the oil market, Fed do next?

What Options Are Signaling for Oil Market, Fed Direction

By Erik Norland, Senior Economist, CME Group

Oil: What Are Options Signaling?

  • Is extreme negative options skewness signaling a rally in the oil market?
  • Prices have often rallied after instances of extreme negative options skews
  • The inverse relationship is even stronger in heating oil, ULSD gasoline
  • But prices could be pressured by rising US output, slack China growth
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High Risks, Low Implied Volatility

  • Options implied volatility in most markets is extremely low despite high risks
  • Implied volatility in EUR/USD and GBP/USD is near record lows
  • Fed’s nine rate hikes since late 2015 have helped to flatten the yield curve
  • Could volatility surge if Fed does not cut rates enough to steepen yield curve?
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