Looking to the Futures

Yesterday we saw our volatility index revert towards its mean amidst comments from U.S. President Donald Trump surrounding the conflict with Iran.  In a phone interview with CBS on Monday afternoon he stated, “The war is very complete.”  A major concern surrounding the U.S and Israel’s war on Iran has been a geographical chokepoint in the Strait of Hormuz which handles a large amount of the world’s oil shipments. 

Volatility in the oil market has been readily apparent as of late with the front month Light Sweet Crude (/CL) contract hitting a high of 119.48 late in the overnight session.  During that same session roughly sixteen hours later the same contract hit a low trade of 81.19. President Trump made major announcements to stabilize oil in cancelling sanctions against any countries who choose to buy Russian oil.  He also emphasized the importance of securing oil flow through the Strait of Hormuz to bolster relations with trade partners who rely on the strait such as China. 

Historically there is a positive correlation between the E-mini S&P 500 Index Futures (/ES) and Light Sweet Crude Oil Futures (/CL) when the CBOE Volatility Index futures (/VX) remain below 20.  As volatility increases above that threshold you will notice the correlation decoupling and even inversing. Yesterday, /ES and /CL posted a figure of -0.90 on our ThinkorSwim correlation study indicating a close to perfect inverse correlation. 

While opportunities arise to set up a complementary or inverse pairs trade of these indexes based on their historical data, it is important to analyze the relationship between volatility and crude oil.  Yesterday as the /CL contract posted a 38.27 intraday range between the high and low trade, the /VX contract saw mean reversion posting a high of 30.19 and closing at 23.89.  The correlation study on ThinkorSwim shows a 0.95 correlation factor between /VX and /CL signifying that crude may play a significant role in driving volatility in the U.S. Equity markets. 

According to the CFTC Commitment of Trader’s Report, dealers are net long /VX futures while leveraged funds are net short.  As /VX has drifted up in price over the past week leverage funds added 20,575 contracts to their short positioning. 

Metals are pushing higher as silver futures (/SI) are up over 5% and gold futures (/GC) posted 2% which is likely due to inflation concerns surrounding a prolonged conflict between the U.S. and Iran. 

Copper Futures (/HG) increased a modest 1.50% as forecasts were published by ING Group expecting a 600-kiloton refined shortage for 2026. 

On the currency front, the South African Rand Futures (/6Z) pushed 2% higher as oil stabilized which will aid in local fuel costs, transport expenses, and inflation data for the country. 

Major economic reports, trading events, and news items that could potentially impact specific futures markets:

NFIB optimism index 6:00 am

Existing home sales 10:00 am

New futures products are available to trade with a futures-approved account on all thinkorswim platforms: 

• Ripple (/XRP)
• Micro Ripple (/MXP)
• 100 OZ Silver (/SIC)
• 1 OZ Gold (/1OZ)
• Solana (/SOL)
• Micro Solana (/MSL)

Visit the Schwab.com Futures Markets page to explore the wide variety of futures contracts available for trading through Charles Schwab Futures and Forex LLC.