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Lately, San Jose Options, Inc., a leading innovator in teaching options trading, has been performing case studies on Commodity trades and the Financials to study the differences and similarities between these products as they relate to option spreads. You'll very likely find this brief summary of their findings over the market crash of 2011 quite striking and surprising.
In using the same strategy over the crash of August 2011 on the RUT and Corn, the studies showed a pronounced increase in the IV which follows the RUT, called the RVX, when compared to the IV on the month of Corn in which they traded. The spread using RUT resulted in a draw-down of 3% while the same trade on Corn made a profit of 5%. The reason for the difference can be explained by the behavior of both price direction and the movement of implied volatility.
These differences in the movement of implied volatility and price direction explain why over the crash of August 2011 on the RUT and Corn, our studies showed a pronounced increase in the IV which follows the RUT, the RVX. The spread on Corn returned a profit of 5% while the same trade using RUT yielded a draw-down of 3% over the same trading month.
In other words, while the RUT dropped 24% the IV rose 160%. Corn rose 12% and its IV rose 35%. This study indicates that the IV in the RUT moved much faster in relation to the price move, as compared to the rate that IV changed due to the price change in Corn.
It appears that the Financials give the illusion that they are more stable than Commodities, but when it comes to option trading, the options on Financials may prove much more volatile than options on Commodities!
Obviously, this is only one case study. However, San Jose Options, Inc. has also been doing studies on Soy Beans and Wheat and they have seen a similar characteristic to the behavior of price to IV.
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.
This is a very interesting study because in order to achieve a higher success rate with our option trades, we are always looking for ways to eliminate the effects of volatility. This study would indicate that trading Corn and other Commodities may be less volatile than trading the Financials such as the RUT, SPX and NDX.
At San Jose Options, Inc. we'll be conducting similar studies to these over time - we never stop experimenting, learning, growing, mastering our field and innovating. So stay tuned. Until then, good luck with your trading and we hope you learned something new and useful from this article!
In using the same strategy over the crash of August 2011 on the RUT and Corn, the studies showed a pronounced increase in the IV which follows the RUT, called the RVX, when compared to the IV on the month of Corn in which they traded. The spread using RUT resulted in a draw-down of 3% while the same trade on Corn made a profit of 5%. The reason for the difference can be explained by the behavior of both price direction and the movement of implied volatility.
These differences in the movement of implied volatility and price direction explain why over the crash of August 2011 on the RUT and Corn, our studies showed a pronounced increase in the IV which follows the RUT, the RVX. The spread on Corn returned a profit of 5% while the same trade using RUT yielded a draw-down of 3% over the same trading month.
In other words, while the RUT dropped 24% the IV rose 160%. Corn rose 12% and its IV rose 35%. This study indicates that the IV in the RUT moved much faster in relation to the price move, as compared to the rate that IV changed due to the price change in Corn.
It appears that the Financials give the illusion that they are more stable than Commodities, but when it comes to option trading, the options on Financials may prove much more volatile than options on Commodities!
Obviously, this is only one case study. However, San Jose Options, Inc. has also been doing studies on Soy Beans and Wheat and they have seen a similar characteristic to the behavior of price to IV.
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.
This is a very interesting study because in order to achieve a higher success rate with our option trades, we are always looking for ways to eliminate the effects of volatility. This study would indicate that trading Corn and other Commodities may be less volatile than trading the Financials such as the RUT, SPX and NDX.
At San Jose Options, Inc. we'll be conducting similar studies to these over time - we never stop experimenting, learning, growing, mastering our field and innovating. So stay tuned. Until then, good luck with your trading and we hope you learned something new and useful from this article!
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By Donald Scott
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