Signal du Jour - short volatility in USO

Oil is digging.

A crisis? Which crisis? A trade war? What trade war? We’re really not sure what you’re talking about—and neither is the market. After yet another remarkable end-of-month flow and strong earnings from Microsoft, equities are now down just 5% on the year and have snapped right back to pre-Liberation Day levels. Amnesia.

But let’s not jinx it. After the roller coaster of April, many would be perfectly happy to see implied volatility bouncing around between 20 and 30 rather than venturing into truly elevated territory. Because if 2025 has taught us anything so far, it’s that amnesia cuts both ways—all it takes is a handful of concerning prints to kick off another wave of selling, like the one we saw this morning following GDP data that already reflect the trade war’s economic drag.

And you're in luck: tomorrow brings an employment report before we drift toward the next FOMC meeting. With that backdrop, we’ll steer clear of equities again and turn instead to oil. Today’s target: USO (or CL if you prefer futures).

Let’s have a look.

The context

Amid mounting fears of a global economic slowdown, USO has had a rough start to the year. The ETF is down a solid 17% and, unlike equities, completely missed the April rally that helped claw back losses elsewhere. In fact, the selloff has accelerated over the past few days as growth data out of China and the US came in worse than economists had anticipated.

Needless to say, realized volatility remains elevated—no small feat when you consider that just six months ago, rising tensions between Israel and Iran were already pushing it to the high end of its range.

Realized volatility is currently higher than during the tensions between Israel and Iran in October.

At a hefty 45%, oil is moving, and there’s little reason to expect that movement to slow over the coming weeks. A quick look at semi-variance confirms the picture: no surprise here—most of the realized volatility is coming from downside action.

Most of the volatility is driven by its downside component.

The picture is pretty clear: unless we see a serious easing of growth concerns—and some actual evidence of improving demand—the realized volatility isn’t likely to cool meaningfully from current levels.

Still, our model suggests that the current readings may be a bit exaggerated. Vol could settle somewhere in the 30–35% range over the next few weeks, easing off from today’s extremes.

Do not expect volatility to go back in the low 20s any time soon.

So what about the options market? With all the noise around trade, tariffs, and growth, it’s fair to assume many participants are highly motivated to hedge—and that extra demand may be distorting insurance pricing.

Let’s take a look.