Key Takeaways with Craig
It was a relatively quieter day in CME’s Equity and Interest Rates markets as the major US stock indexes were down, but by less than 1%, while Treasury yields moved higher. The Micro 2-Year was up by another 12 basis points and the 10-Year by about 7, widening that inversion once again.
We thought it was a good opportunity to highlight CME’s grains markets, especially given the report that is scheduled to be released later this week. On Friday, March 31st, the USDA will release its Prospective Plantings report which will give the market the first indication of which crops US farmers intend to produce this year. In other words, the report will detail what proportion of Corn versus Soybean US farmers intend to plant for the upcoming year. As you can imagine, the report holds market moving potential in CME’s grains markets.
Perhaps unsurprisingly, volatility in CME’s grains options has increased as we move toward the release of this report. The top graph below shows the CVOL level in Corn (blue line) and Soybeans (orange line) over the last three months. Remember, CVOL provides a representative measure of 30-day volatility, inclusive of out of the money through in the money strikes. The lower graph depicts Corn options volatility using only the at the money strike, but with different days to expiration. As you can see, the options that expire Friday, after the release of the USDA report, are trading at much higher volatility than the subsequent expiries, reflecting the market moving potential of that report.
As you also might notice, CME has two different options that expire on Friday; one with the May future and one with the December future as the underlying instrument. This is significant because the December future represents what is known as the “new crop”, or the price of the corn that will be harvested this year, and, due to crop conditions, storage costs, supply/demand conditions and other factors, can trade at a different price than the Corn that has already been harvested and is being stored (‘old crop’). So, this option, based on the December future, allows a trader to gain exposure to the price of the December (new crop) Corn but without all of the time value that would exist in an option that expired closer to December.
For example, the at the money Call in the option that is based on the December future, but expires on Friday is currently offered at 9’7*; the option that is based on the December future but that expires 241 days from now is offered at 43’3*. In US Dollar terms, this represents a difference of $493.75 versus $2,168.75.
*based on prices from CME Direct 10:20 AM Chicago Time
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