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IMPLIED VOLATILITY VS HISTORICAL VOLATILITY, LME CU This chart shows copper prices (red line, right scale) against Implied Volatility (Month 3, dashed blue line)  average, green line) both annualised, left scale.  Volatility tend to converge, otherwise options would be mispriced, but there can be discrepancies over the short term.


Over this chart period, average Implied Volatility   explained by intra-day opportunities to trade gamma   close basis.


ICE RAW SUGAR VOLATILITY The following chart shows the price for March 2020, and the rolling 10 day m.avg historical volatility for March 2020 futures.


The average historical volatility for March 2020 futures over this chart period was 18.8% annualised, on a daily close /close, 10 day rolling basis.


Using LME Copper as a guide, but allowing for  implied volatility for March 2020 to be around 21% annualised, which is consistent with current implied volatility for ICE Raw Sugar March 2020 around 20%-22%.


COMMON LME HEDGING STRATEGIES APPLIED TO RAW SUGAR


ICE RAW SUGAR CONSUMER HEDGING EXAMPLE Basis ICE Raw Sugar for May 2019 at 12.77 cts/lb. a white sugar buyer might choose to hedge their price exposure for Jan 2020-June 2020 through:


a. Buying a Fixed Price Swap at 14.18cts/lb, or


b. Buying Call options at 16.50cts/lb Strike = 0.50cts/lb cost, or


c. Buying the 16.50cts/lb Call and selling the 12.50cts/lb Put at net zero premium cost.


Source: ADMISI


The chart compares hedged prices for each of the strategies, with the Put option giving full upside  which is why many producer hedgers prefer a “Collar” strategy giving the same Put option protection, with upside participation to the short Call strike, at zero net premium cost:


Chart 1


Source: LME/Reuters/ADMISI


Chart 2


Source: Reuters/ADMISI


Chart 3


21 | ADMISI - The Ghost In The Machine | March/April 2019


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