OIL OPTIONS-Oil Volatility Index sets all-time low

Thu Apr 26, 2012 5:08pm EDT

* Implied volatility slides as oil moves up

* Large Dec Brent call deal gets traders talking

* NYMEX crude options are focused on June calls

NEW YORK, April 26 (Reuters) - The Chicago Board Options Exchange's Oil Volatility Index fell to a record low on Thursday at 24.60 percent as crude futures moved slowly in a tight range.

The index represents implied volatility in U.S. crude oil futures and is a mathematical measurement of traders' perceptions of risk in the oil markets.

The index is based on trade in the U.S. Oil Fund, which is invested in the U.S. crude oil futures market on the New York Mercantile Exchange over various months, but heavily weighted toward the prompt month.

The downtrend in the index dates to April 11, when it peaked at 31.79 percent.

The index opened at 25.68 percent and promptly dropped as crude futures gently undulated throughout the day, trading in a narrow range defined by the 100-day moving average on the bottom and the 50-day moving average on the top.

At 9:47 a.m. EDT (1347 GMT), the volatility index eclipsed its five-year low at 24.99 on its way to a midday low of 24.62 percent.

"We shouldn't really be surprised to see implied volatility decrease on market rallies that are relatively smooth," said Michael Korn, president of Princeton, New Jersey-based options brokerage Skokie Energy.

Korn said the single biggest driver of an option premium's volatility is the underlying instrument, and U.S. crude prices have been anchored in a $102-$105 range for most of the year.

By the close of business, the index settled near its low for the day at 24.62 percent.

Roughly 10,000 $140 Brent calls for December 2012 were heard done at $2.03 on the Intercontinental Exchange, in the only large trade reported on either exchange. This trade doubled the amount of open interest at that strike price and left the trade wondering who the counterparties were.

In New York Mercantile Exchange action, most of the activity was focused on June and December 2012 calls and call spreads, but volumes were small and the traders few and far between, brokerage sources said.

Over the last week, open interest on the June $125, $130, $135, $140 and $150 calls rose by a combined 3,000 lots, only to decline by 1,100 lots in the last two days.

Over the same time frame, open interest in the December $125, $130, $135, $140 and $145 calls rose by a combined 1,500 lots, while the $150 call posted a modest open interest decline.

Traders use the open interest figures as a proxy for perceptions of geopolitical risk, so the mixed messages these two snapshots give is of less certainty of major upheavals in Iran or Europe.