Figure 1: Corn CVOL has skewed positive nearly 96% of the time since January 2007
However, it is possible that relatively few of them are buying put options to protect themselves against extreme downside risk, preferring to hedge those risks through futures instead of options. Additionally, some cautiously optimistic farmers might sell futures and simultaneously buy call options so that they can benefit if crop prices rise above the futures curve.
Figure 2: Soybean CVOL has skewed positively over 84% of the time since January 2007
It has to be assumed that investors are behaving rationally in their pricing of options on corn, soybeans and wheat in the event inclement weather or other potential disruptions such as war pose extreme risks to the upside. Just because that has not been reflected in past futures price movements does not necessarily mean that traders could be wrong to price them in the future.
In any case, the gap between options markets that skew upward and futures markets whose prices don’t show a strong upward skewness in actual returns might provide an interesting opportunity for liquidity providers to take a closer look at the agricultural options market.
Erik Norland Senior Economist and Executive Director CME Group
E:
erik.norland@
cmegroup.com
Figure 3: Wheat CVOL has skewed positively over 88% of the time since January 2007
Test for Skewness: Corn 0.07 -0.97 -1.44 0.21 -0.10 -0.99
1970s 1980s 1990s 2000s 2010s 2020s
Wheat 0.00 -0.87 -0.13 0.18 0.21 0.18
Soybeans Soy Meal Soybean Oil -0.36 -0.18 -0.70 -0.57 -0.45 -0.77
0.01 -0.02 -0.38 -0.50 -0.27 -0.09
Source: Bloomberg Professional (C1, W1, S1, SM1, BO1) CME Economic Research Calculations
Table 1: The statistical test for skewness shows little or no tendency for the daily changes in futures prices to reflect more extreme upside risk than extreme downside risk.
-0.70 0.11 0.20 0.09 0.17 -0.49
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17 | ADMISI - The Ghost In The Machine | Q1 Edition 2023
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