By Ann Koh Feb. 4 (Bloomberg) -- Crude oil volatility, which has dropped to its lowest in two years, will stay at current levels until prices breach a “band” that surrounds them in the next couple of months, according to Hudson Capital Energy. Oil traded in New York will fluctuate by 25 to 35 percent until prices break free of the $65 to $85 a barrel range, said Clarence Chu, an options trader at Hudson Capital in Singapore. Crude prices, if able to successfully drive up to $90 a barrel or slide down to $60 in the next one or two months, would push implied volatility above 50 percent, he said. The $65-to-$85 “band” uses the highest and lowest prices of the front-month crude contract in the past five months, Chu said. “We have been range-bound, trading sideways,” said Chu. “Most important is the breaking down or up in the short term for the implied volatility to go up significantly.” The Chicago Board Options Exchange’s crude oil volatility index, which measures the market’s expectation of 30-day price fluctuations, sank to a two-year low of 28.52 on Jan. 19 amid the global economy on the mend from last year’s recession. The index reached a record 100.42 on Dec. 11, 2008 after losses on mortgage loans led to financial failures including the bankruptcy of Lehman Brothers Holdings Inc. Prices of crude oil call options for May delivery in New York have dropped from last year’s high in October, as investors found it less risky to buy options amid more stable oil prices. The call option to buy crude at a strike price of $80 a barrel has declined 51 percent from October. Crude futures have declined 3.2 percent this year. The contract for March delivery on the New York Mercantile Exchange was at $76.80 a barrel in electronic trading, down 18 cents, at 9:17 a.m. Singapore time. CBOE’s OVX rose 2.21 points to 34.65 at yesterday’s close. To contact the reporter on this story: Ann Koh in Singapore at akoh15@bloomberg.net

Source