Key Takeaways with Craig
Due to meeting schedules, we’re writing the Key Takeaways column in mid-afternoon trading and, as of now, the major US Equity Indexes are mostly lower, though the Nasdaq is still positive by just a few points. US Treasury markets are particularly quiet as the Micro 2-Year Yield is down by just a couple basis points and the Micro 10-Year up by just a couple. So, we decided to use today’s Key Takeaways column to introduce a new Agricultural Options expiry that CME will be launched next week (Jan 23) as well as a very brief lesson on the seasonality in CME grains markets.
New Crop Weekly options will exercise into “new crop” futures (December for Corn; November for Soybeans) and will expire on Fridays from February through August.
What does “new crop” and “old crop” mean?
New crop and old crop instruments reflect different physical supplies and behave accordingly. For example, in June, the front-month Corn futures instrument expires in July, reflecting stores of corn harvested the prior autumn. On the other hand, the new crop Corn futures instrument at that time expires in December and reflects the anticipated supply resulting from the corn crop that is currently being grown. So, old crop can be thought of as the grains that are in storage while the new crop is still in the ground.
Real-life example – May versus December Corn futures in 2022
The March 2022 spike in the May-December Corn futures spread demonstrates how the market prized nearer-term supply, more aggressively bidding up the May contract over the December contract given uncertainty of immediate Black Sea stocks after the onset of the Russo-Ukrainian War. Prices for both May and December Corn surged, though demand for front-month corn was so much stronger that the May-December spread increased 160% from mid-February to early-March 2022
How does the new versus old crop impact options pricing?
Because of the fundamental supply and demand differences in new versus old crop, each options market has a different volatility curve. As you can see in the graph below, early in the year, the new crop implied volatility in corn options traded substantially under that of the old crop. However, you see the difference in implied volatility narrow as the calendar moves into the summer months, when the crops still in the ground are most vulnerable to weather conditions.
Also, regular readers of the Key Takeaways column know that there is a volatility relationship between Calls and Puts called skew. In addition to the seasonal volatility mentioned above, there is also a seasonal relationship in options skew between old and new crop months.
The new crop weekly options will allow market participants to precisely fine-tune their short-term exposure to the upcoming crop year, even as the current front-month instrument reflects the old crop year.
For a more detailed write up of this Key Takeaways column please click here
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