Trading Commodities Vs. Financials

San Jose Options, Inc. is one of the leading innovators in the options teaching industry. Lately, they have been doing case studies on Commodity trades and the Financials to understand the similarities and differences between the two products when used with option spreads. The results of their studies over the market crash of 2011 have been quite eye-opening.

Their studies have found a marked increase in the IV which follows the RUT (the RVX) compared to the IV on Corn for the month they traded. The spread using RUT yielded a draw-down of 3% and the same trading strategy on Corn earned a profit of 5%. They explain this difference by referring to the behavior of price direction and the movement of implied volatility during this period.

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.

So, while the RUT dropped 24% and its IV rose 160%, Corn rose 12% and its IV rose 35% during the same volatile period of time. As unexpected, surprising and counter-intuitive as this seems, the IV in the RUT moved much faster in relation to the price drop than the rate IV changed compared to the price hike in Corn.

So surprisingly, since Commodities have such a reputation for high volatility, options trading on Financials may be substantially more volatile that trading options on Commodities.

And don’t immediately write this off as an isolated anomaly. San Jose Options, Inc. has also been doing studies on Soy Beans and Wheat and finding similar price to IV behaviors there as well.

Since the IV changes are more pronounced in the study of the RUT, one can conclude that using options on the RUT over the recent crash would have proven to be much more volatile and difficult to manage when compared to the same trade on Corn. In fact, the RUT trade lost money while the Corn trade made money. Although Corn moved half as much as the RUT over this testing period, the IV on Corn only moved one-fourth as much. This would indicate that the Financial trade was impacted twice as much by the rise in IV as the Corn trade.

In order to achieve higher success rates with option trades, SJO continues its quest to find ways to eliminate the effects of volatility. This very interesting study demonstrates how trading Corn and other Commodities can be less volatile than trading the Financials such as the RUT, SPX and NDX.

San Jose Options, Inc. will be conducting more similar studies on the topic. Until then, good luck with your trading, and I hope you learned something new from this article!

Trade safer! Trade smarter! Visit San Jose Options Mentoring Course online today for your free Option Trading Video on stocks and commodities.

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