Signal Du Jour - short vol in BOIL

High implied volatility ahead.

What’s cooler than being cool? Being cold in summer. The least we can say is that spring in Europe felt like winter, and summer still feels more than a few degrees Celsius away.

Is this the reason why the price of gas has gone up lately? This is far from our area of expertise. There is always interesting seasonality in these products, and the fact that weather patterns have become more extreme and a little less predictable could explain some of these movements.

As far as we are concerned, we will stick to our neutral stance and express a view on volatility. Today, our focus will be on BOIL, the leveraged ETP tracking the performance of natural gas and amplifying it by a factor of 3. Get your umbrella ready—sorry, I meant your straddle; isn’t that the same thing?

The Context

BOIL is an interesting ETP. It gives exposure to the performance of natural gas futures and guarantees to amplify it by a factor of 3. We’ve always struggled to understand why someone would need such a product, but again, we are not here to judge; we are simply here to trade. By the way, if you have a good explanation, do not hesitate to contact us—we’re always keen to learn more.

Interestingly enough, because of that leveraged performance, BOIL is up a staggering 15% over the last week and down 22% over the past six months.

With such wild swings, one can imagine what the realized volatility in the product has been like. The movement has been consequential, without any surprise.

As expected, the realized volatility in BOIL is much higher than in UNG

If volatility went down overall in the natural gas complex over Q4 2023 and Q1 2024, it has gradually increased over Q2, amplified by the construction of BOIL. However, at 63, it is far from the highs observed in the most recent major market turmoil in 2022.

Could we get there in the next few weeks? That seems stretched. However, landing in an area between 70 and 80, or around the 50th percentile, is reachable.

Even though the realized volatility is on the rise, we still have a long way to go before reaching the uncomfortable level of risk.

As one might guess, the options market has to consider such wild moves when quoting insurance premiums. Volatility sellers likely demand a healthy premium to factor in the chance of violent changes in direction observed in the product.

Let’s have a look.

The data and the trade methodology

Let’s start by looking at the reconstitution of a VIX-like index for BOIL using the CBOE methodology. We also use the bid price of the options, as the mid-price can give a slightly distorted view of reality.