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Implied Volatility Patterns Around Crop Reports

Author

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  • Diersen, Matthew
  • Wang, Zhiguang

Abstract

CME Group lists weekly and short-dated new crop options for corn, wheat, and soybeans to complement standard and serial options. Weekly and short-dated new crop options on futures provide market participants with a way to trade more precisely around events such as USDA crop reports. While the finance literature has identified that short-dated options can provide exposure to both volatility and jump risks, these phenomena have not been identified in agricultural commodities. The intra-day release of reports is suspected of masking volatility patterns. Regular and short-dated options are examined to determine whether nearby and newcrop futures respond similarly to fundamental information in major crop reports. Both nearby and new-crop futures have higher price variability on report dates. In general, the implied volatility of short-dated options is reduced following the release of fundamental reports. There is evidence of concavity in the implied volatility distribution during the release date prior to release of reports, suggesting that jumps are expected before some reports.CME Group lists weekly and short-dated new crop options for corn, wheat, and soybeans to complement standard and serial options. Weekly and short-dated new crop options on futures provide market participants with a way to trade more precisely around events such as USDA crop reports. While the finance literature has identified that short-dated options can provide exposure to both volatility and jump risks, these phenomena have not been identified in agricultural commodities. The intra-day release of reports is suspected of masking volatility patterns. Regular and short-dated options are examined to determine whether nearby and newcrop futures respond similarly to fundamental information in major crop reports. Both nearby and new-crop futures have higher price variability on report dates. In general, the implied volatility of short-dated options is reduced following the release of fundamental reports. There is evidence of concavity in the implied volatility distribution during the release date prior to release of reports, suggesting that jumps are expected before some reports.

Suggested Citation

  • Diersen, Matthew & Wang, Zhiguang, 2023. "Implied Volatility Patterns Around Crop Reports," 2023 Conference, April 24-25, 2023, St. Louis, Missouri 379021, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc23:379021
    DOI: 10.22004/ag.econ.379021
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    References listed on IDEAS

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    1. Andrew Dubinsky & Michael Johannes & Andreas Kaeck & Norman J Seeger, 2019. "Option Pricing of Earnings Announcement Risks," The Review of Financial Studies, Society for Financial Studies, vol. 32(2), pages 646-687.
    2. Xiaolan Jia & Xinfeng Ruan & Jin E. Zhang, 2021. "The implied volatility smirk of commodity options," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(1), pages 72-104, January.
    3. Diersen, Matthew & Wang, Zhiguang, 2022. "Weekly Options on Grain Futures," 2022 Conference, April 25-26, 2022, St. Louis, Missouri 329788, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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