How can MRCI research be used to trade options?
Timing and direction of price movement are at least as important to options traders as to futures traders. Both win if price moves favorably. But one primary component of an option's premium is time, passage of which makes an option a decaying asset. If prices move sideways over time, the value of a futures contract does not change but that of an option declines. Further, if prices move unfavorably, a futures position can usually be rolled over into another delivery month at minimal additional cost whereas an option eventually expires worthless.
Thus, MRCI's seasonal analysis lends itself to options trading because the strength of seasonal research is discovering historical reliability in timing and direction. Traders know well in advance how strong is a market's tendency to move which way, when, and for how long.
Although there is often a direct relationship between a long call or put and the direction of a seasonal tendency in futures, sometimes an options trader must make certain accommodations with seasonal strategies. For instance, options may expire in a market before a seasonal strategy exits. In certain cases, then, an options trader wanting to take advantage of a seasonal tendency must devise a practical options strategy --- be it short or long an option for a deferred delivery month. MRCI provides the research for a trader to better make his own trading decisions.
But another primary component of option premium is volatility, a measure of risk (for prices to move). Much like an insurance policy, risk is directly reflected in the premium. MRCI has found that volatility also has seasonal tendencies. For example, prices for soybeans and corn are far more likely to move sharply during July --- when crops are most needy, weather most erratic, but production most determined.
An options trader can be right on price direction but, if he buys high volatility or sells low volatility can still lose money. MRCI volatility charts, available to MRCI Online subscribers, overlay current historical and implied volatility levels onto a graph depicting "normal" levels throughout the year. Daily updates available via e-mail provide numerical details which apprise an options trader of whether and how much volatility is greater or lesser than average. Again, MRCI provides the research for a trader to better make his own trading decisions.
*Implied Volatility Description (IV):
Current daily level of Implied Volatility (IV) for options on this futures contract, as derived from (implied by) options premiums (Black-Scholes).
*Historical Volatility Description (HV):
Current daily level of 20-day Historical Volatility (HV) for this futures contract, as calculated from futures price movement.
*Central Tendency Description (CTHV):
Current daily level of the Central Tendency of Historical Volatility(CTHV), the 15-year average of 20-day historical volatility (of futures prices). Thus, CTHV is the historical reference against which to compare IV and HV. CTHV is also used to calculate +1 and -1 STD (Standard Deviation), between which HV has theoretically been found 67% of the time.
*Implied Volatility Over/Under Percentage Description (IV+-%):
The percentage the current Implied Volatility (IV) is above or below the Central Tendency (CTHV).
Days to Expiration Description (D2Ex):
Conveniently enumerates how many days until options on that futures contract expire.
For a complete description of the IV, HV, and CTHV columns click here, or click on each column header for individual descriptions.
MRCI Online also provides daily, weekly & monthly volatility charts for ALL the major commodity markets!
Want to see what these charts look like? View Sample Charts Here — these are the exact 3 chart styles included in the report.
