OptionEye Feb 23rd
End of Day Corn Volatility
The above chart shows just what we have been dealing with as of late. The straddle values are getting crushed as volatility expectations get driven into the ground. This is not unique to corn. It is happening in most commodities and fixed income as well. Just look at the straddle prices. The March straddle wich expires tomorrow after the close is offered at 11.50 cents. We are having ranges that big. Makes it very difficult to trade but gives producers an opportunity to trade options cheaply.
Oil and Greece/EU continue to be the boogeymen in the market.
I would advise great caution for the next 6 weeks.
Re: OptionEye Feb 23rd
My software is showing the Dec 12 volatility in the 19's. The reason this number is crucial is because from my understanding they take the last five days of trade in February to determine the volatility factor in order to determine the premium for Federal Crop Insurance. If my software is correct, the premium should be cheaper as last year's volatility factor was either in the 22's or 23's.
Re: OptionEye Feb 23rd
A straddle is an option strategy that is comprised of two options, both a call and a put on the same strike. For example in the corn we are now trading 637 in May corn. As a result of the underlying price trading 637, the straddle would be the 640 straddle. The straddle is comprised of both a call and put option on the same strike that is usually at the money. When I say "At The Money or (ATM)", I am referring to the option strike that is closest to the current underlying value of the futures contract. In this case the 640 strike in May corn (CK). The reason that we use the straddle as an indication of the volatility of a given market is that volatility will be at its greatest for an option that is ATM. The volatility curve looks very similar to a bell curve with the highest volatility being nearest the strike that the underlying futures contract is trading.
This is all important because it gives us a measure of the volatility in the market. We can then look at levels on a historical basis to determine if the levels are low, high or stagnant. Do not make the mistake that volatility is an indication of direction. Corn could be trading on its lows and then break out of a range to the downside and volatility could spike. It all has to do with uncertainty and fear in a marketplace.
One way to look at volatility is to look at it as uncertainty. The greater the possibility of outcomes is for an event to occur, the greater the uncertainty of that event taking shape is, and thus greater volatility in the marketplace.
For example, if you were to make a bet on this weekend's Kansas Mizzou game you may not bet the farm because you are not certain of the outcome of the game. This would be an example of high volatility. The outcome is uncertain so a bet you make will have some premium in it or volatility. However, when there is 1min left in the game and the Jayhawks are up by 14 points, the outcome of the game is all but certain. There is little premium in the bet or volatility.
Looking at option strikes if you are long the 450 calls in May then the likelihood of that strike finishing in the money is high and is why they would fall to the right side of a bell curve. The same would be true of a put that was 150 points in the money. The likelihood of that option finishing in the money is high. This is why the volatility of an option is greatest for ATM options. There is a 50-50 chance that the 650 calls finish in the money when May corn is trading 650.
In terms of the markets we generally see higher volatilities in markets that are breaking out of ranges to the up or downside, before agricultural or economic reports, or sharp directional shifts in direction. We generally see lower volatility in the markets when a market is trading sideways, has been range bound, or is trending in a range.
When you look at volatility in the grains right now we are seeing rather low volatility and I think it can be attributed to the fact that we have been trading in the same range in both the corn and the wheat for some time.