Key Takeaways with Craig
US Equity prices rose today as this we look toward the first full week of 3rd quarter earnings reports. All four major US indexes were higher and implied volatility in CME’s Equity Index options markets fell, even as violence in the Middle East continues. US Treasury yields rose today, again more at the longer end of the curve than the short, as the Micro 10 and 30-Year Yield futures were higher by about 9 basis points (bps), while the Micro 2-Year was up by only about 3.5 bps; this narrows the inversion between the Micro 2s and 10s to just over 30 bps. CVOL in CME’s Treasury options rose and is trading near 3-month highs.
WTI Crude Oil futures prices were down by about 1% today, and options markets continue to reflect uncertainty driven by the Israel-Hamas war. The green line in the CVOL graph below shows the convexity in WTI Crude Oil options over the last three years and the purple line shows the skew. Remember, convexity in options refers to the relationship between the out of the money options to those at the money. Therefore, the spike in the graph below suggests that the implied volatility in the out of the money options has risen relative to the ATM. The skew reflects a rise in Call volatility relative to Put volatility. The combination of these two measures then suggests that the options market is pricing upside risk in WTI Crude Oil futures, particularly ‘at the wings’.
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