“Drought” Options – Implied Vol Up 50% This Month for Some Ag-based ETFs

A recent Reuters news report indicated that “Grain prices pushed to record highs on Thursday as scattered rains in U.S. Midwest did little to douse fears that the worst drought in half a century will not end soon or relieve worries around the world about higher food prices. Government forecasters did not rule out that the drought in the U.S. heartland could last past October, continuing what has been the hottest half-year on record.” 

What can securities investors do about the 2012 drought? Investment vehicles that investors could explore include options on agriculture-based exchange-traded products (ETPs); here is a short list of four of the many such products (CBOE is not endorsing or soliciting for these products; please read the applicable prospectus) —

  • DBA -PowerShares DB Agriculture Fund
  • JJG – iPath DJ-UBS Grains Subindex ETN
  • MOO – Market Vectors Agribusiness Fund
  • CORN – Teucrium Corn Fund

RISE IN IMPLIED VOLATILITY THIS MONTH

According to Bloomberg estimates, the implied volatility for the “110%-moneyness” options on the PowerShares DB Agriculture Fund (DBA) rose from 16.6 at the end of June to 25.2 on July 19th (an increase of 52%). See the chart below for more info on recent implied volatility, and note the recent differences in implied volatility for DBA options based on their moneyness.

PRICES FOR AG-BASED ETPs RISE

As shown in the chart below, over the past seven weeks (May 31st through July 19th) the iPath DJ-UBS Grains Subindex ETN (JJG) rose 45%, and the Teucrium Corn Fund ETF (CORN) rose 35%.

MORE VOLUME IN CALL OPTIONS

Investors exploring the possibility of using ag-based ETF options should do due diligence and examine the volume and liquidity of various ETF options.

In the month of July the total volume for calls has been more than twice the amount of put volume for both DBA and CORN ETF options.

CBOE OPTIONS ON ETFs

Key Features of CBOE options include:

  • Clearance of transactions is guaranteed by the Options Clearing Corporation
  • Price and Quote Transparency
  • Daily Mark-to-market

Bullish options strategies include: (1) long call, (2) bull spread, (3) call backspread, and many others.

Bearish options strategies include: (1) long put, (2) bear spread, and put backspread, and many others.

To learn more about CBOE options strategies, please visit —

http://www.cboe.com/Strategies, and

http://www.cboe.com/LearnCenter

More information on CBOE Options on Commodity-based ETFs is at —

http://www.cboe.com/commodity