San Jose Options, Inc. is one of the leading innovators in the options teaching industry. Lately, they have been doing case studies on Commodity trades and the Financials to understand the similarities and differences between the two products when used with option spreads. The results of their studies over the market crash of 2011 have been quite eye-opening.
During our study, we saw an increase from 21% to 55% in the RVX, essentially the IV of the RUT. This is about 160% increase in implied volatility. During this same period, the IV of Corn rose from 25% to 34%. We also studied price movements and found that over this same period of time the RUT dropped from 858 to 650 for a total of 208 points - a price drop of 24%. Also during this period, Corn rose from 616 to 689 for a total increase of 12%.
The RVX tracks the IV of the RUT and it increased from 21% to 55% during the SJO study. Just to be clear, this is an increase in implied volatility of about 150%. During the same period, the IV of Corn rose from 25% to 34% for an upsurge of only 36%. Looking at price movements, also over this period of time, the RUT dropped from 858 to 650; a total of 208 points. This is a drop in price of 24%. On the other hand, Corn rose from 616 to 689 for a total increase of 12% during this very same period.
So, while the RUT dropped 24% and its IV rose 160%, Corn rose 12% and its IV rose 35% during the same volatile period of time. As unexpected, surprising and counter-intuitive as this seems, the IV in the RUT moved much faster in relation to the price drop than the rate IV changed compared to the price hike in Corn.
It appears that the Financials give the illusion that they are more stable than Commodities, but when it comes to option trading, the options on Financials may prove much more volatile than options on Commodities!
You may be thinking this is only one isolated case study, but San Jose Options, Inc. has also been doing similar studies on Soy Beans and Wheat. So far, similar characteristic results show up in the behavior of price to IV performance using these commodities as well.
It appears that options trades on the RUT over the recent crash would have proven much more volatile, and difficult to manage, than the same trade on Corn! In fact, the RUT trade lost money while the Corn trade made money. Corn moved only half as much as the RUT over our testing period while the IV on Corn moved only one-quarter as much. The Financial trade, in other words, was impacted twice as hard by the rise in IV as the Corn trade was.
As we stated when we started out above, we continually look for ways to eliminate the effects of volatility in order to achieve a higher success rate with our option trades. Our study indicates that trading Corn and other Commodities can be less volatile than trading the Financials such as the RUT, SPX and NDX! These Commodity trades might even be consistently less volatile... Imagine that!
San Jose Options, Inc. will conduct similar studies on this topic to gather more evidence of these striking trends. Good luck with your trading until then. Hopefully, you've learned something from this article that's given you a few ideas to think about...
During our study, we saw an increase from 21% to 55% in the RVX, essentially the IV of the RUT. This is about 160% increase in implied volatility. During this same period, the IV of Corn rose from 25% to 34%. We also studied price movements and found that over this same period of time the RUT dropped from 858 to 650 for a total of 208 points - a price drop of 24%. Also during this period, Corn rose from 616 to 689 for a total increase of 12%.
The RVX tracks the IV of the RUT and it increased from 21% to 55% during the SJO study. Just to be clear, this is an increase in implied volatility of about 150%. During the same period, the IV of Corn rose from 25% to 34% for an upsurge of only 36%. Looking at price movements, also over this period of time, the RUT dropped from 858 to 650; a total of 208 points. This is a drop in price of 24%. On the other hand, Corn rose from 616 to 689 for a total increase of 12% during this very same period.
So, while the RUT dropped 24% and its IV rose 160%, Corn rose 12% and its IV rose 35% during the same volatile period of time. As unexpected, surprising and counter-intuitive as this seems, the IV in the RUT moved much faster in relation to the price drop than the rate IV changed compared to the price hike in Corn.
It appears that the Financials give the illusion that they are more stable than Commodities, but when it comes to option trading, the options on Financials may prove much more volatile than options on Commodities!
You may be thinking this is only one isolated case study, but San Jose Options, Inc. has also been doing similar studies on Soy Beans and Wheat. So far, similar characteristic results show up in the behavior of price to IV performance using these commodities as well.
It appears that options trades on the RUT over the recent crash would have proven much more volatile, and difficult to manage, than the same trade on Corn! In fact, the RUT trade lost money while the Corn trade made money. Corn moved only half as much as the RUT over our testing period while the IV on Corn moved only one-quarter as much. The Financial trade, in other words, was impacted twice as hard by the rise in IV as the Corn trade was.
As we stated when we started out above, we continually look for ways to eliminate the effects of volatility in order to achieve a higher success rate with our option trades. Our study indicates that trading Corn and other Commodities can be less volatile than trading the Financials such as the RUT, SPX and NDX! These Commodity trades might even be consistently less volatile... Imagine that!
San Jose Options, Inc. will conduct similar studies on this topic to gather more evidence of these striking trends. Good luck with your trading until then. Hopefully, you've learned something from this article that's given you a few ideas to think about...
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