A moontower.ai user asked about oil volatility and correlation in the context of WTI and Brent crude. I did the editorial equivalent of showing him a cool scar:
Let me take these in turn.
USO is relatively illiquid these days relative to the futures options. It used to be more liquid. I spent the better part of a decade relative value trading it vs the futures options including doing create/redeems (I was constantly at OCC position limits — which have a horrible one-size-fits-all application).
Long-dated USO options are very interesting instruments because they are effectively long-dated options on a rolling CL1 contract. This is very different from say a 12-month futures option that references a less volatile CL12 contract.
This difference is why you can relative value trade it, but it’s a complicated model (actually I think a good interview question for a trader or quant is to come up with a model for this conceptually). It’s nice that it offers you an option chain on CL1 while the futures options don’t.
As far as Brent or for that matter heating oil and rbob which you didn’t ask about, the correlations to WTI change periodically when the fundamental details become bottlenecks in their respective markets. Refineries can’t just easily switch their slate between product grades so you can get over/under supply idiosyncracies. There’s an active “arb option” market which is options struck on the spread between WTI and Brent.
Further complicating matters is that Brent and WTI futures and futures options for a given month do not have the same expiries so when you do relative vol trades between them you end up with these residual calendar risks (brent options expiring a week earlier than WTI!)
There was a period of time where this is all I traded so to download all there is to say on this is impossible. You can make a career out of doing nothing else. If you like bloodshot eyes and your hair to be drained of youthful pigment of course.
Calendar spread options to bootstrap up a continuous cl1 volatility. Or asian over last month exercise versus American exercise with expiry at end of at of month to sort of tease out a forward volatility. (When I was active the Asian option markets were strictly otc. and while exchange ho options & futures went off the board on the same day (eom), WTI futures went off the board around the third week of the month which means the otc Asian over a particular calendar month was actually a blend of two futures contracts. So using the difference between an Asian option and an American option to try and tease out a market implied forward volatility wasn’t as clean with WTI as it would have been with Ho)
Lots of possibilities.