|
Fort Collins, CO | It seems like the options market is expecting a quiet week followed by building volatility into July and fading thereafter. As part of how we manage risk, we model volatility based on implied volatility in the options market. We keep the volatility inputs in our model very close to those implied by the marketplace, but they will likely not match exactly. Below is a chart showing two different types of volatility, term and forward. We used our model volatilities to produce the chart, so they should be pretty close to market-implied volatility. In this chart, term volatility is the dark line, and forward volatility is the lighter area. For our purposes here, we will define term volatility as the market's expectation for volatility between now and the end of the term. You can think of this as classical implied volatility. Forward volatility is the expected volatility between two different term expirations. With a little math, we can calculate a "breakeven" forward volatility between two expirations. Essentially this is the volatility needed between points A & B to justify point B's term volatility and assuming the market actually delivers point A's term volatility between now and point A's expiration. By breaking out the forward volatilities, we can get a rough "map" of where the market expects volatility to deliver.
Looking at this chart, the pockets of volatility mostly make sense with my intuition. I would expect more volatility over the next four days than implied the market price for short-dated March options, so that's one place my intuition and the market do not match. As I said in the WCMU, just because it is cheap does not make it a good bet, trading options with four days to expiration is a highly variable proposition at best. The big spikes from short-dated April to May and short-dated July to August make sense to me. In both cases, the later expiration catches the quarterly USDA numbers, while the former does not. When the October and November serials are listed, I would expect a similar jump between them.
In the deferred contracts, those with different underlying futures contracts, this method is slightly less reliable because there is likely to be some slippage in the futures spreads.
Edited to make it clear that the chart is for corn in the 2021 crop year.
Edited by qrmllc 2/13/2021 12:48
 (20210213 Term versus Forward version 2 (full).jpg)
Attachments
----------------
 20210213 Term versus Forward version 2 (full).jpg (122KB - 31 downloads)
| |
|
Weekly Corn Market Update
