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.
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|
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.
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.
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
Stay on top of all ag-related news by following the CME Group Agriculture Showcase page on LinkedIn or by following CME Group on Twitter.
View the current version and an archive of the Ag Update online at cmegroup.com/education/ag-update.html
Data as of June 30, 2021 unless otherwise specified.
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.
Save time identifying trends. Get free, daily reports sent to your inbox highlighting significant changes in volume, open interest, price, volatility, and skew.
This article by Erik Norland, Senior Economist at CME Group, examines the following signals from the ag market: