“Drought” Options – Implied Vol Up 50% This Month

A recent Reuters news report indicated that “Grain prices pushed to record highs on Thursday as scattered rains in U.S. Midwest did little to douse fears that the worst drought in half a century will not end soon or relieve worries around the world about higher food prices.  Government forecasters did not rule out that the drought in the U.S. heartland could last past October, continuing what has been the hottest half-year on record.”

What can securities investors do about the 2012 drought?  Investment vehicles that investors could explore include options on agriculture-based exchange-traded products (ETPs) (CBOE is not endorsing or soliciting for the products below; please read the applicable prospectus.)

RISE IN IMPLIED VOLATILITY THIS MONTH

According to Bloomberg estimates, the implied volatility for the “110%-moneyness” options on the PowerShares DB Agriculture Fund (DBA) rose from 16.6 at the end of June to 25.2 on July 19th (an increase of 52%). See the chart below for more info on recent implied volatility, and note the recent differences in implied volatility for DBA options based on their moneyness.  Ag Implied Vol

 

PRICES FOR AG-BASED ETPs RISE

As shown in the chart below, over the past seven weeks (May 31st through July 19th) the iPath DJ-UBS Grains Subindex ETN (JJG) rose 45%, and the Teucrium Corn Fund ETF (CORN) rose 35%.

Ag ETF prices

 

OPTIONS ON ETFs

Key Features of U.S-exchange-listed options include:

  • Clearance of transactions is guaranteed by the Options Clearing Corporation
  • Price and Quote Transparency
  • Daily Mark-to-market

Bullish options strategies include: (1) long call, (2) bull spread, (3) call backspread, and many others.

Bearish options strategies include: (1) long put, (2) bear spread, and put backspread, and many others. To learn more about  options strategies, please visit —

http://www.cboe.com/Strategies, and

http://www.cboe.com/LearnCenter

More information on options on Commodity-based ETFs is at —

http://www.cboe.com/commodity

Broad commodity based indexes include the S&P GSCI Index and the S&P World Commodity Index (WCI).

The posts on this blog are opinions, not advice.
Please read our disclaimer for Indices.

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