Does Trading requires volatility ???

[Dr.Masih Rezvani + 27]

There are different kinds of oil price movements. The first case, which today is only of historical interest, arises when oil prices in international trade were administered first by a group of major oil companies and subsequently by OPEC. The oil price behaviour followed then a typical pattern characterised by periods of different lengths during which a reference price (eg Arabian Light 34 API) remained constant in nominal dollars. We had therefore price episodes, and the passage from one episode to the other was the result of a punctual decision by the entity which happened at the time to administer the price of oil. We had then occasional price shocks rather than continuous volatility. The fundamental difference is in the nature of the adjustment process that shocks and volatility induce.
The second case describes a price regime that was introduced in 1987 and that is still ruling today. OPEC no longer fixes the reference price. The exporting countries now sell oil in international markets on the basis of price formulae which use as reference the spot or futures prices of certain marker crudes, namely WTI, Brent or Dubai.
The behaviour of prices in the world petroleum market is essentially that of these marker crudes. Volatility therefore arises in the complex and interrelated set of spot, futures and other derivatives markets.
Volatility is simply a characterisation of price changes over time. In futures markets the changes are almost continuous. They occur both within and between trading days. Prices change in responses to ‘news’ – that is to a very wide variety of information data which influence traders’ views on whether it is opportune to buy or sell. If the news, for example, are bullish some will want to buy and they will raise the bid price to the level that will persuade others to sell.
Relevant news do not exclusively relate to the exact state of the supply/demand balance which in any case is generally unknown. Traders also respond to news that alter perceptions of future market developments such as policy statements, economic forecast, industrial events etc. As important are the information that a trader may gather or the guesses s(he) may make about the positions taken by other traders and their trading optimization strategies.
Trading requires volatility. Without it there will be no need to hedge and where there are no hedgers, there are no brokers . But trading can also cause additional volatility; additional here refers to price changes brought about by strategies which are not determined by responses to perceived changes in current or future fundamentals but by the search for pure trading profits.

[Gary LeBlanc + 50]

So the next question Doc is how is volatility measured in WTI and how can a trader benefit from the volatility.

[Martin + 31]

I have to say I quite enjoyed reading the short discourse on oil price volatility, thank you.

Although I do have to inquire as to whether there is a fundamental issue or perhaps hidden question elucidated within the narrative as the topic title asks, "Does trading require volatility?" and then subsequently it is stated in the third last line, "Trading requires volatility".

Unsurprisingly the next respondent has little choice but to move the conversation along by asking subsequent relevant questions which, if answered, should provide more insight.

So I wonder please, was there perhaps another question or issue that the original poster was hoping to highlight or one he hoped that perhaps others might raise on the topic of volatility?

 

[Gary LeBlanc + 50]

First of all volatilty is not necessary for trading a market, but changes in volatility is evident in options trading. Volatilty does not change when the market is closed. In the case of WTI, the WTI market is closed one hour each day and on weekends. The OVX does not change value regardless of any "news" during this time. It is especially useful in determing the value of options. When using Black Scholes to calculate the price of options one of the five criteria is the volatility index of that specific option. For example, when pricing options for the S&P 500 the VIX is used as the volatility index. When pricing options for WTI the OVX is utilized. Knowing the difference is critical. When the OVX approaches 40 on the OVX WTI options are being sold by the market makers at inflated prices due to demand. As the OVX comes down in value ( and all the other variables remain relatively constant ) the market makers are covering those short-call positions at a considerable profit. This is how the market makers continually rape the long-options traders...over and over and over. The returns in the WTI options from the market makers' perspective are the most lucrative in my 40 years of trading. 

  As an example I'll use the Saudi drone attack to show how the OVX causes exaggerated pricing. The day before the attack the OVX was around 35. On the first day of trading after the attack the Nov 60 WTI call was at $2.77 and the OVX was above 70. Two days later the OVX was back down to pre-strike level and the Nov 60 call was down 70% to .75 although only 2 days had elapsed. Market makers were covering the short positions at enormous profit.

Edited December 8, 2019 by Gary LeBlanc

[canadas canadas + 136]

How about liquidity?  Has anyone who trades in WTI ever physically seen or owned a sample of WTI?  It is a beautiful thing to be admired.