Why are commodity options so "rich"?

Discussion in 'Options' started by heech, May 28, 2009.

  1. heech



    This isn't a rhetorical question, and I have no problems admitting I'm a complete newbie when it comes to commodity options. I'm just genuinely surprised at what seems like relatively high rates of implied volatility inside commodity options.

    ZM (Soybean meal), ZS (Soybean), ZC (Corn)... all have IV in the 30% range. When I measured historical volatility using daily returns, at least from about Jan-May of this year (not a huge sample size)... I'm seeing measured volatility in the 10%-15% range. That seems like a pretty significant gap, at least in the long run.

    So, am I just looking at too small of a sample...? Or is my math wrong in some other way?
  2. 1) There's a seasonal tendency for grain volatility to trend higher during the growing season because of weather concerns.
    2) It tends to collapse after Cargill "deems" the new-crop to be better-than-expected. :cool:
  3. dmo


    If that's true, then you should be able to make money by reverse gamma scalping - selling straddles or strangles and getting delta neutral at the same intervals you used to calculate the actual volatility.
  4. heech


    Shhhhh. :)
  5. heech


    Thanks... so IV might be higher right now because we're in the midst of the growing season, while there was little HV earlier this year. I'll pick up some standard texts so I can better understand the seasonal tendencies.

    So *this* is why there are financial instruments out there based on weather patterns.. who knew?

    It's already tiring enough being focused on unemployment numbers or what not, and now I have to worry about heat-waves and rainstorms...
  6. heech


    Yep, I can easily see that ZC volatility goes much higher from Sept through December... HV is 20%+, peaking at ~45% after October (looking back 30 days on November 1st).

    ZW volatility peaks 2-4 weeks later, same general range. It also shot up to almost 100% in March of '08? What happened back then?

    ZO is similar to ZC, peaks at almost 60% HV in early November.

    ZM looks better behaved... only peaks at 35%.
  7. can you post a sample graph ( with RV and IV overlays) ?
  8. heech


    Where would I get historical IV values for the commodities? I use ivolatility for equities, but I don't believe they have similar numbers for commodities.