As one of the leading innovators in the options teaching industry, at San Jose Options, Inc. we are constantly looking for new ways to eliminate the effects of volatility so we can achieve higher success rates with our option trades. As part of this ongoing quest, we’ve been doing case studies on Commodity trades and the Financials to evaluate the similarities and differences between these products, specifically as they apply to option spreads. Our studies over the market crash of 2011 have yielded some eye-opening results.
Their studies have found a marked increase in the IV which follows the RUT (the RVX) compared to the IV on Corn for the month they traded. The spread using RUT yielded a draw-down of 3% and the same trading strategy on Corn earned a profit of 5%. They explain this difference by referring to the behavior of price direction and the movement of implied volatility during this period.
The RVX, which tracks the IV of the RUT, increase from 21% to 55% during the study. This represents an increase in IV of about 160%. The IV of Corn during this period rose from 25% to 34% for a change of 36%. Another aspect of the study included the price movements. Over this period of time the RUT dropped from 858 to 650 for a total of 208 points. This equates to a 24% drop in price. Corn on the other hand, rose from 616 to 689 during this period for a total move of 12%.
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.
So even though Commodities may have a reputation for being so volatile, the Financials may give the illusion that they are more stable, but when it comes to option trading, the options on Financials may be much more volatile than options on Commodities.
And don’t immediately write this off as an isolated anomaly. San Jose Options, Inc. has also been doing studies on Soy Beans and Wheat and finding similar price to IV behaviors there as well.
We have to conclude that using options on the RUT over the recent crash would have been more volatile and difficult to manage than the same trade on Corn, since the IV changes are a lot more prominent in the study of the RUT. Surprised? In actual fact, the Corn trade made money while the RUT trade lost money. Corn moved only half as much as the RUT over SJO’s testing period. Significantly, the IV on Corn only moved one-fourth as much as the RVX. The Financial trade was influenced twice as heavily 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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