Abstract
This paper explores the forecasting power of implied volatilities (IVs) in the crude oil and natural gas options markets from 2005 through 2012. In these markets, IVs are efficient forecasts of future volatility. The information content of oil and gas IVs differs substantially and systematically by strike price displaying a “frown” pattern which is roughly the mirror image of the IV smile pattern. For crude oil options, the most informative in terms of predicting future volatility are IVs on nearby group and deep inthe- money options. For natural gas options, IVs from near-the-money options contain considerable information regarding future volatility.
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