TWIFO 364: Exploring New Markets for Volatility Traders
Aug 11, 2023
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The podcast discusses movers and shakers in the futures options markets, including energy and ags. They explore options trading strategies for Chicago wheat and volatility trading in commodity option markets. Listener feedback on VXX trading is discussed, along with performance and structural problems with VXX. The use of reverse splits in options trading and the attractiveness of leveraged ETFs are also explored.
The poor performance of the 30-year auction resulted in a significant drop in the value of the future contract, indicating a potential sell-off.
Skew analysis in the wheat options market suggests a cautious sentiment and anticipation of a price decline, making collar strategies attractive.
There has been increased trading activity in NatGas puts and collars, indicating a cautious sentiment and a belief in a temporary decline or a more neutral outlook.
Deep dives
The recent 30-year auction did not go well, causing a drop in the future contract value.
The 30-year auction this week resulted in poor performance, leading to a significant drop in the value of the future contract. The future lost almost a full point, declining from 122.5 to 121.5 in just about 10 minutes. Puts in the 118 strike were sold, indicating some anticipation of a potential sell-off. Additionally, put spreads, such as the 118-114 put spread, were executed, suggesting a more bearish outlook for the 30-year contract.
Wheat options show a favorable skew for collars, leading to increased collar strategies.
Skew analysis in the wheat options market reveals a favorable environment for implementing collar strategies. The puts are currently 7.7% cheaper while the calls are 11.7% bid. This skew makes it attractive to sell calls and purchase puts for hedging purposes. Recent trades have shown a significant amount of collar activity with traders selling higher strike calls and buying lower strike puts, aiming to generate a credit or reduce overall downside risk. This indicates a cautious sentiment in the wheat market and a potential anticipation of a price decline.
NatGas experiences a significant upside move, leading to increased put trading and collar strategies.
NatGas witnessed an upward price movement, resulting in increased trading of puts and collar strategies. The recent rally in NatGas led to a surge in trading of the two and two-half puts, with approximately 50,000 contracts traded. Additionally, traders opted for put spreads such as the 118 and 114 put spread, selling the 118 puts and buying the 114 puts. This indicated a belief that NatGas may experience a temporary decline or a more neutral outlook. Overall, there were significant trading activities in both puts and collars, suggesting a cautious sentiment in the NatGas market.
Volatility in Chicago Wheat Options
Chicago wheat options have experienced significant activity recently, particularly in collars. These collars include 5,000 contracts of 700 calls in September and 5,000 contracts of 800 calls in December. Traders have been actively entering and exiting these positions throughout the week, with Monday seeing the highest volume. The options on Chicago wheat futures offer dynamic skew and implied volatility, making them attractive to volatility managers.
Increased Trading Activity in Lean Hogs
Lean hogs options have seen a surge in trading volume, with 60,000 contracts traded this week. This represents a significant increase compared to previous years when only a few thousand contracts were traded. The options market for lean hogs offers attractive implied volatility levels, with the at-the-money 30-day implied volatility currently around 86.1%. Traders have been actively trading puts and calls at various strike prices, with a focus on the February 80 puts and the October 78 puts. These options have seen substantial trading volume and have mostly been opened earlier in the week.
HOST: Mark Longo, The Options Insider Radio Network
CME GROUP HOT SEAT: Russell Rhoads, Kelley School of Business, Indiana University
We discuss the movers and shakers in the futures options markets including energy (nat gas, heating oil), ags (wheat, lean hogs), equities, rates and much more.
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