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Fort Collins, CO | Good question.
Before I get to it, allow me to explain our model volatility (MV) briefly. Our MV approximates where implied volatility (IV) is trading in the options market. The at-the-money MV we publish for a given expiration should be close to most other published estimates of IV. Differences can come from a variety of factors in different models. Some models might use the nearest strike, while others might normalize a true at-the-money when the futures are between strikes. Some models might use calendar days, while others might use trading days. Some models might account for exchange holidays differently. Some models might strictly use settlements, while others might attempt to estimate the mid-market price of an option in live trading. Even something as small as interest rates could affect the calculation. Suffice it to say; that any published IV depends on various factors that may differ between models. The important part is consistency within a model to make different values comparable across timeframes. Long story short, our MV should approximate other IV estimates but may differ for various reasons.
IV is, effectively, a way to compare the price of options across different timeframes and underlying prices. IV is also the amount of volatility that dynamic hedgers need to realize in the marketplace to break their options positions even - a topic we cover in this article on Option Replication ( https://www.quartziteriskmanagement.com/option-replication ). Higher IVs (and hence higher option prices) usually indicate higher uncertainty in the marketplace. In other words, traders are willing to pay more to limit their risk with options when they are less sure about the future path of underlying prices.
In the grain and soybean markets, IV usually correlates positively with the underlying futures price (as the chart in the original post shows). Arguably, this tendency is because higher futures prices often reflect greater uncertainty in the market (a growing risk premium). This tendency is just that, a tendency. As they did this week, futures prices and IVs can move in different directions. If the question is "What do this week's price and IV action mean for futures prices?" then the only answer I can give is "I don't know." About the only thing I can say is that I probably wouldn't add many corn options to a portfolio in a week like this. Unless we get a significant move to justify the higher IV, I doubt IV will increase in Dec22 corn options next week.
Concerning the war in Ukraine, it would be easy to forget that we closed the week ending 2/25 lower (though on a massive range that included a significant new contract high). That kind of realized volatility (RV) in the market is often enough to drive IVs higher regardless of the direction of futures prices. What I find interesting about this week is that we had relatively normal trading without a massive increase in RV. So, one might expect the typical correlation between price and IV to hold, but it didn't. In the end, I think this week's action is an interesting data point that one might add to the other factors in their overall analysis.
I hope that's what you were looking for, but let me know if I missed the mark. I would be happy to try again.
Thanks for the response,
James
Edited by qrmllc 5/21/2022 12:05
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Weekly Corn Market Update *BONUS CHART*
