Crude Oil Market Volatility There are two commonly referenced
measures of market price uncertainty: historical volatility and
implied volatility. Historical volatility measures how much
prices have varied in the past, and implied volatility uses
options prices to measure how market participants believe prices
will vary in the future. In the Brent crude oil market, implied
volatility is currently higher than historical volatility
because of continuing market uncertainties (Figure 1). Implied
volatility is expected to remain high until these uncertainties
are resolved. Historical volatility is calculated from the daily
price movements of the front month futures price, typically for
a 30-day period. It provides a snapshot of the magnitude of
recent up-and-down price movements, but by definition is a
backwards-looking metric. Implied volatility is calculated from
the prices of call and put options traded on futures contracts.
The Black-Scholes option pricing model is widely used to price
crude oil futures options