Q3 2021 Ag Update

  • 9 Jul 2021
  • By CME Group

Short-term option market share at record levels

Over the last several months, we have seen tight fundamentals across the grain and oilseed markets with strong exports to China and dwindling ending stocks. Recent weather concerns have driven volatility to new levels, which are reflected in options premiums. These conditions have driven market participants to use Short-Dated New Crop options and Weekly options in record numbers. In June, short-term options represented 20% of total Corn option volume, the highest percentage ever.

Options prices reflect market risk and the potential for a payoff. Basic option pricing theory says the higher the probability of the option having value at expiry, the more expensive the option premium will be. This is primarily driven by market volatility and time-to-expiration. As you can’t change the former, short-term options look at the latter – time to expiry. Unlike traditional options where you may pay for months of time value, short-term options allow you to pay for as little as one week, significantly reducing premium costs.

There are two types of short-term options, Short-Dated New Crop options (SDNC) and Weekly options.

  • SDNC options are based on the new crop contract (December Corn, November Soybeans) and expire well before the standard option based on the new crop future. They are offered with expiries every month from October of the previous year through September. This earlier expiry date can substantially reduce the premium cost versus the standard option.

Expiring August Short-Dated New Crop options vs. standard options.

Option Product Underlying Future Price Strike Days Until Expiration Premium
Standard Corn Option December Future $5.50 $7.00 160 16 cents
Short Dated New Crop Corn Option (August Expiry) December Future $5.50 $7.00 35 4 cents
  • Weekly options are options on the nearby futures contract which expire every week on Friday that is not a standard expiration date. Because of the very short life of these options, they can be extremely inexpensive relative to other options, but only provide protection for a small window. For this reason, we see market participants use these types of options around specific events like market reports. 

Source: CME Group

Both SDNC and Weekly options provide greater flexibility and precision to customize your risk coverage or trading strategy in these high volatility markets.

Explore alternative option products

International growth in Ag options

This past quarter, Ag options have grown significantly within the international marketplace. Non-US regions drove Ag options average daily volume (ADV) +300% and +600% ADV for short-term options compared to Q2 2020.

Oil demand is changing the dynamics of the soybean trade

As the energy market transitions to less fossil fuel-based products, biofuels and hydrogenated vegetable oil (HVO) are becoming part of the solution – increasing the importance of hedging key feedstocks, such as soybean oil, in the biofuels sector. Recently, Soybean Oil options implied volatility traded over 40% for the first time since 2008, increasing open interest to over 300K contracts, a new record.

The white paper, "Global Feedback Volatility Intensifies for Biofuels," written by CME Group researchers Paul Wightman and Fred Seamon, examines the factors impacting heightened demand for soybean oil and the benefits of hedging an increasingly volatile commodity.

Source: CME Group

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Data as of June 30, 2021 unless otherwise specified.

CME Group Volatility Index (CVOL)

Track volatility and skew over time to help put context around current market conditions in the ag space. In addition to benchmark ag products, CVOL is now available for Soybean Oil, Soybean Meal, Live Cattle, Lean Hogs, Class III Milk, as well as a volatility-weighted Ag Index.

Learn about Ag CVOL

Ag Intel: Data-driven recaps of the corn, soybean, and Chicago wheat markets

Save time identifying trends. Get free, daily reports sent to your inbox highlighting significant changes in volume, open interest, price, volatility, and skew.

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South American Soybean futures continue to grow

  • SAS futures have over 800 contracts of open interest, as of the end of May, with average daily volume of 132 contracts during the month.

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Signals from Ag Options and Futures

This article by Erik Norland, Senior Economist at CME Group, examines the following signals from the ag market:

  • Rebound in global economy, inclement weather rally corn, soybean, and wheat.
  • Implied volatility in corn is at its highest since the 2008-2012 period.
  • High volatility in corn, wheat expected to moderate in late 2021.
  • Traders expect wide range in prices: from record highs to the lows set in 2000.

Read full article