• Grain options CVOL exhibits a tendency to skew positively, particularly with out-of-the-money (OTM) calls, which are frequently priced higher than OTM puts.
  • There is limited evidence suggesting that crop prices were more prone to extreme upward than extreme downward movements from 1970 to 2023.
  • The persistent upside CVOL skew may be attributed to differing hedging habits among participants in the market.

Since 2007, out-of-the-money (OTM) call options have generally traded at higher implied volatility than similar OTM put options. This has been the case 84% of the time for corn, 99% of the time for wheat, 74% of the time for soybeans,80% of the time for soybean meal and 99.3% of the time for soybeans (see CVOL charts in the appendix).

When calls are consistently priced higher than puts, it implies that investors believe in more extreme risks to the upside than downside. This phenomenon persists even in the absence of compelling evidence supporting the notion that crop prices tend to exhibit the potential for moving higher rather than lower.

Examining a decade's worth of data reveals a lack of consistent tendencies in crop prices favoring extreme upside movement, hinting at the potential presence of inefficient pricing within the options market. Further, it opens the market to questions about why the options skew has been so strongly positive?

We measure implied volatility using the CME Group Volatility Index (CVOL), which is the first cross-product family of implied volatility indices based on simple variance. The CVOL index for each commodity or financial futures uses a simple variance methodology that assigns equal weighting to strikes across the entire implied volatility curve. In addition to producing an overall CVOL number covering all strike prices, it also produces UpVol, the implied volatility on options with strikes above the current trading level of the market, and DownVol, the implied volatility on options with strikes below the current trading level of the market. The difference between these numbers gives us the CVOL skew: UpVol-DownVol = CVOL Skew.

Utilizing the conventional skewness test for daily returns, it becomes evident that since the 1970s, no consistent skew patterns exist in either direction. Across various products, skews oscillate between positive and negative over successive decades. Despite sporadic instances of robust skews, their longevity appears limited. A closer examination reveals nearly equal occurrences of negative and positive skews for most products. The singular exception lies in soybean meal, consistently exhibiting a negative skew.

Table 1: Statistical skew of daily price returns in futures markets by decade since the 1970s

Test for Skewness Daily Data
  Corn Wheat Soybean Soybean Meal Soybean Oil
1970s 0.52 0.12 -0.03 -0.57 0.04
1980s 0.63 -0.81 -0.24 -0.12 0.01
1990s -0.22 -1.35 -0.55 -0.71 -0.73
2000s 1.42 0.30 0.18 -0.53 -1.28
2010s 0.67 -1.18 0.41 -0.86 -0.79
2020s -0.36 -2.21 0.22 -1.42 -0.76

Source: Bloomberg Professional(C1, W1, S1, SM1, BO1)
CME Economics Researach Calculations

While some argue that daily data is susceptible to the statistical concept called autocorrelation, a shift to weekly data does little to alter the overall landscape. Specifically, transitioning to weekly returns, data fails to provide substantial support to the notion that OTM calls should be priced higher than OTM puts. On a weekly basis, the majority of products maintain mixed skews, with wheat and soybean meal leaning more towards negative skewness. It's crucial to note that a skew is only deemed strong when exceeding 1 or falling below -1. However, for both wheat and soybean meal, their skews remain relatively modest, offering no indication of significant trends.

Table 2: The evidence of positive skew from weekly data is no stronger than with daily data

Test for Skewness Weekly Data      
  Corn Wheat Soybean Soybean Meal Soybean Oil
1970s 0.51 0.06 0.31 -0.30 0.10
1980s 0.64 -0.19 -0.02 -0.21 0.03
1990s -0.24 -0.87 -0.37 -0.06 0.20
2000s 1.43 -0.02 0.13 -0.81 -0.86
2010s 0.67 -0.62 0.39 -0.42 -0.42
2020s -0.35 -0.57 1.50 -0.29 -0.07

Source: Bloomberg Professional(C1, W1, S1, SM1, BO1)
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While skewness provides a higher level of understanding of the return profile, a closer examination of the top 10 most up weeks and top 10 most down weeks offers a more detailed perspective. Analyzing the average return during these distinctly positive and negative weeks, a noteworthy finding emerges—there is no significant difference in terms of amplitude between extreme upside risk and downside risk. The exception to this trend occurred in the soybean complex during the 2000s when negative returns surpassed positive returns, contributing to a unique pattern in that specific timeframe.

Table 3: A closer look at top 20 volatile days reveals similar facts

Average Return of Top 10 Most up/down Weeks
  Corn Wheat Soybean Soybean Meal Soybean Oil
1970s 10.52% -9.90% 12.55% -11.02% 13.54% -14.63% 16.87% -15.06% 14.91% -16.14%
1980s 9.62% -9.92% 7.56% -7.91% 10.15% -10.57% 10.03% -9.87% 11.03% -11.06%
1990s 9.58% -11.07% 10.26% -10.83% 9.27% -8.99% 10.80% -9.08% 8.01% -7.62%
2000s 11.36% -12.29% 12.26% -11.66% 8.94% -13.49% 10.18% -14.52% 9.47% -11.21%
2010s 10.29% -12.42% 12.08% -10.31% 6.77% -8.83% 9.43% -11.55% 7.19% -6.68%
2020s 9.17% -10.35% 10.92% -10.48% 6.97% -8.08% 8.61% -8.94% 9.66% -9.87%

Source: Bloomberg Professional(C1, W1, S1, SM1, BO1)
CME Economics Researach Calculations

The showcased data contrasts with our past observations of the CVOL skew over the last 15 years. Notably, since 2007, both wheat and corn options consistently display a positive CVOL skew. Soybean oil and soybean meal show a similar inclination, albeit on a smaller scale. Soybeans, however, stand out as a potential outlier, with a positive CVOL skew observed approximately two-thirds of the time.

Occasionally, it may be entirely appropriate for perceptions of extreme upside risk to outweigh extreme downside risk, for example, when there’s heightened uncertainty of geopolitical tension, supply chain issues etc. A notable instance of this phenomenon occurred in the wheat market at the onset of Russia's invasion of Ukraine in February 2022.

Several potential explanations exist for the inclination of options to skew positively in the grains market. Firstly, there's the structural explanation: On one side, numerous farmers, facing the primary risk of falling prices would typically be inclined to purchase put options as a safeguard against downward price movements. On the other side, a relatively small yet highly sophisticated group of buyers, mainly concerned with extreme upside price movements, naturally gravitates towards call options. It is plausible that these buyers, including food processing and distribution companies, exhibit a greater inclination towards hedging using options compared to farmers, who might prefer hedging primarily through futures.

Alternatively, another potential explanation could be attributed to the inherent optimism or the fear of missing out among farmers. It is plausible that many farmers mitigate the risk of downward movements in grain prices by adopting a strategy of selling futures and acquiring call options. In this approach, short futures positions serve as a hedge against downside moves, while long positions in call options enable participation in any potential extreme upside movements. Another possibility is that crop insurance programs alter the incentives to buy call and put options leading to a stronger preference on the part of market participants for upside rather than downside protection.

Regardless of the explanation, it prompts one to consider the potential for a liquidity provider to enter the market and serve as a seller of upside protection and/or a buyer of downside protection. This consideration arises due to the absence of compelling evidence indicating that these markets are inherently prone to more extreme daily upside movements in prices compared to downside movements. This doesn't dismiss the existence of extreme upside price risk; rather, it suggests that such risk might be overvalued in the options markets relative to the potential for extreme downside risk


Figure 1: Corn CVOL skews upward the vast majority of the time

Figure 2: Soybean CVOL skews upwards two-thirds of the time & is the least skewed

Figure 3: Soybean meal options also skew higher around 85% of the time

Figure 4: Soybean oil options have also been positively skewed over 80% of the time

Figure 5: Wheat options have been among the most positively skewed

Agriculture data

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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.

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