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Implied Volatility of Oil Futures Options Surrounding OPEC Meetings

Stephen M. Horan, Jeffrey H. Peterson, and James Mahar

Year: 2004
Volume: Volume 25
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol25-No3-6
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Abstract:
This study examines implied volatility from options on crude oil futures surrounding OPEC meetings. Studies suggest that the implied volatility embedded in option prices should drift upward prior to scheduled information releases and drop afterward. As predicted, volatility drifts upward as the meeting approaches and drops by three percent after the first day of the meeting and by five percent over a five-day window period. Surprisingly, highly visible bi-annual conferences experience little drop in volatility. Rather, the most pronounced decline in volatility is associated with meetings of the Ministerial Monitoring Committee, which makes production recommendations to the larger conference. The results have implications for the debate about whether OPEC influences oil prices and provide an explanation for previously documented return anomalies in crude oil futures surrounding OPEC meetings.





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