Understanding Volatility Cones

Volatility cones can be a powerful tool for options analysis but many traders don’t know how to use them. They normalize ATM (at-the-money) volatility curves based on the number of days to expiration. This gives you the ability to quickly and accurately assess a contract’s volatility level related to where recent contracts have traded given the same remaining number of trading days.

To access QuikStrike’s vol cone tool, first navigate to QuikVol in the upper left hand corner of QuikStrike. Under QuikVol Home, go to Volatility Cones:



From here, select the product you’d like to view as usual. We’ve selected Interest Rates –> US Rates –> Eurodollars. If you haven’t used vol cones with the selected product before, QuikStrike will prompt you to select the expirations you’d like to view. To do this, go to the Expirations dropdown menu above the charting area.


Once you’ve selected your expirations you should get something like this:

The y-axis shows the volatility and the x-axis shows the number of days until contract expiration.

Note that Essentials users will default to vol cones generated from one month of history while paid users will default to six months of history. Both versions allow you to show curves from historical dates under the “Compare” drop down menu, and both versions give you display options (for example, some users prefer to reverse the orientation of the x-axis to show 0 Days to Expiration on the right hand side).

Decoding the Cones

The lightest color cone (grey shaded area), labeled “Min/Max”, contains all of the vol levels for the time period specified in the “Date Range” drop down menu. The next lightest cone, labeled “5/95” contains 90% of the vol range (excluding 5% on the downside and 5% on the upside). The third cone, labeled “LQ/UQ” – for lower quartile and upper quartile – contains 50% of the historical vol range (excluding 25% on the downside and 25% on the upside).

The arithmetic mean is shown in dark grey and the interpolated curve based on the most recent measurements is shown in black. Markers denote contracts (diamonds) and constant maturity values (circles). Clicking on a marker will bring up its details:

In this example, the Jan18 contract (EDF18) is trading below the average vol level for a contract with 45 days to expiry but is within the LQ/UQ cone. Feb18 and Mar18 (visible in the full vol cone screenshot) are both well below average, but the Apr18 (EDJ18), Jun18 (EDM18), and Sep (EDU18) contracts all have vol levels above the six-month mean.

Everything you need to know about the upcoming OPEC meeting

OPEC’s next meeting is scheduled for this upcoming Thursday, November 30th. While the meeting itself is expected to go smoothly, OPEC’s impact has been waning since Russia joined the conversation late last year (see also “Putin Crowns Himself OPEC King“). TankerTrackers is looking for an extension of the relatively successful production cuts that were implemented November 30th of last year, potentially with more nations added to the deal. Money managers have not forgotten the last meeting (25 May 2017) in which the prudent move was to buy the rumor and sell the news.

As of Friday’s close, WTI ended the week +4.0% and Brent finished +1.8%.

Conflicting 2018 forecasts

In their Oil Market Report released earlier this month, the International Energy Agency (IEA) lowered its demand forecast for this year and next. Opposingly, OPEC’s forecast for 2018 was adjusted higher in their November Monthly Oil Market Report. Obviously only one of these predictions can be correct – but one can’t help but wonder – with the political machinations going on in Saudi Arabia – if OPEC’s forecast is somewhat biased.

Systemically low volatility has subjugated oil markets

In spite of the upcoming meeting and unrest in the middle east, oil vol has been steadily ticking down since the middle of the year and is currently at lows not sustained since 2014. Pictured below are the constant maturity volatilities for 7, 14, and 30 day ATM options:

Upcoming options expirations offer unique precision to play the meeting

LO1Z7 expires Dec 1st (underlying CLF8)
LO2Z7 expires Dec 8th (underlying CLF8)
LOF8 expires Dec 14th (underlying CLF8)

Open interest and max pain

Max pain prices are unsurprisingly strictly decreasing. For more information on max pain login to QuikStrike and go to “Market Reports” –> “OI – Max Pain” –> “What is Max Pain?” (in the upper right hand corner).

Spotlight on Oil

Unrest in the Saudi Arabian political sphere over the weekend drove oil up more than 3% in Monday’s trading session with Brent above $64 and WTI above $57 – highs not seen since summer 2015. After nearly a year and a half of rangebound trading, global geopolitical uncertainty seems to be giving an already bullish market the confidence to run.

ATM volatility predictably jumped as well with a larger jump in WTI than in Brent:

And here are the vol curves compared to a week ago:

For non-oil traders, here’s a short breakdown of Brent vs WTI:

Brent – light sweet crude oil extracted from one of four oil fields in the North Sea. Typically refined in Northwest Europe. Contracts are listed on the ICE.
WTI – light(er) sweet(er) crude oil produced in the United States, price settled at Cushing, Oklahoma. Typically refined in the midwest and gulf coast regions. Contracts are listed on the NYMEX (part of CMEGroup).

(Both contracts are quoted in USD. Contract sizes are 1,000 barrels with a tick ($0.01) worth $10.)