Trading Soft Commodity Assets
The term commodity refers to commercial items delivered by different producers that share uniform quality and a common value.
The history of commodity trading starts 6.500 years ago, during the early Sumerian civilization. Nowadays, there are tens of commodity exchanges worldwide offering the chance to individual investors to profit from commodity price fluctuations. There are six main categories of commodities:
(1) Precious Metals (gold, silver, platinum etc.)
(2) Industrial Metals (copper, aluminum etc.)
(3) Energy Assets (crude oil, natural gas, etc.)
(4) Agricultural Commodities (corn, coffee, soybeans, sugar etc.)
(5) Livestock (hogs, cattle, and feeder cattle)
(6) Other Commodities (rubber etc)
Full information about the categories of commodities and their assets are found below in this article.
Financial Instruments for Trading Commodities
There is a great number of financial instruments used for commodity trading:
(1) Standard Futures and Options
(2) Exchange Traded Commodities or ETCs (Commodities traded in organized exchange markets are called Exchange Traded Commodities)
(3) Forward Contracts and SWAPS
(4) Contract for Differences (CFDs)
(5) Exotic Options and Binary Options
(6) Commodity ETFs
(7) Trading Commodity Stocks
Forecasting Market’s Volatility using two CBOE Volatility Indexes (VIX & Skew Index)
Options volatility indexes are used in forecasting future market volatility and the investor sentiment. The analysis of such volatility measures may assist investors managing and diversifying their portfolio more effectively.
In this analysis, two (2) important market volatility barometers are presented, both calculated based on the volatility of CBOE options:
The CBOE includes several other volatility indexes on stock indices, ETFs, shares, commodities and tradable volatility contracts (VIX options, VIX futures, etc.). At the end of this analysis, you may find the full range of CBOE volatility indexes.
(1) CBOE Volatility Index (^VIX)
The CBOE Volatility Index (VIX) is considered the most important barometer of equity markets volatility. The VIX Index is based on options contracts, on the S&P 500 Index (SPX). It is designed to reflect investors' consensus view of 30-day expected stock market volatility.
The Role of Options Volatility as Forecasting Tool
The price of the call and put options can be used to calculate implied volatility because volatility is one of the factors used to calculate the value of these options. Any volatility modification of the underlying instrument makes an option contract more (or less) valuable, as there is a greater (or smaller) probability that the option may expire in-the-money, at the end of its maturity.
■ The Greater the Options Volatility → the Greater the Option Price -Therefore, other things being equal, a higher option price incurs greater volatility.
Note: The other two main factors when pricing an option, except volatility, include intrinsic value and time to maturity.
The VIX is quoted in percentage points and translates, roughly, to the expected movement (with the assumption of a 68% likelihood i.e. one standard deviation) in the S&P 500 index over the next 30-day period, which is then annualized.
■ Example (based on CBOE guide):
If VIX is 15, this represents an expected annualized change, with a 68% probability, of less than 15% over the next 30 days; thus one can infer that the index option markets expect the S&P 500 to move up or down 15%/√12 = 4.33% over the next 30-day period. That is, index options are priced with the assumption of a 68% likelihood (one standard deviation) that the magnitude of the change in the S&P 500 in 30-days will be less than 4.33% (up or down).