Commodity Futures and Volatility

[williamblake72]

Hi all,

I always hear the fact that for stocks when price goes up volatility goes down, and vice versa. The VIX index seems to confirm this kind of inverse relation, being that VIX measures implicit volatility on options on SP500.

For commodity futures, what is the relation that plays between price and volatility? It is still valid or is more when price goes up also volatility goes up? How it is possible to measure and proof it? Do you know any service with backtest on it?

Thanks

 

[SunTrader]

I wouldn't consider it fact that volatility goes down when price goes higher.

Many high priced stocks often have high volatility / high participation from the public, as well many low priced stocks have low volatility / low participation from the public.

Volume is a better indicator of volatility, but inversely meaning the higher (above typical average) volume goes up so goes volatility and vice versa.

Same with futs.

 

[2rosy]

There is probably free data to check but from experience commodities go (limit) up due to a shock. Something bad happened. Implied vol goes up to.

 

[williamblake72]

I wouldn't consider it fact that volatility goes down when price goes higher.

Many high priced stocks often have high volatility / high participation from the public, as well many low priced stocks have low volatility / low participation from the public.

Volume is a better indicator of volatility, but inversely meaning the higher (above typical average) volume goes up so goes volatility and vice versa.

Same with futs.

Thank you very much, so if i understood well, your thesis is that volume is more correlated with volatility and there is direct correlation. Thus, there is no correlation at all between price and volatility in your opinion either for stocks either for commodities?

I ask this question because i am thinking on some option strategies to be applied / backtested on seasonality of stocks or commodity futures, and I would like to have a position which, in case the price action goes wrong on direction at least will have an advantage on volatility. I was thinking to the following:
- Stocks (e.g. SPY): since in theory there is this inverse correlation btw price and volatility (as you mention not always, but we can say that in the majority of cases is observed), i am opening a option position which could be vega-negative if price goes down (against me) so that i will lose with direction but volatility is helping to hedge a bit the position (since in theory volatility goes down and this is good for the position).
- Commodity Futures (e.g. Cocoa, Soybeans, etc): here i am not so sure price and volatility are inversely correlated, thus my initial question

 

[williamblake72]

There is probably free data to check but from experience commodities go (limit) up due to a shock. Something bad happened. Implied vol goes up to.

Exactly, I have this perception too from experience. How I can backtest this thesis? From your experience is true also the contrary: if price goes down this is the expected behaviour on commodity futures (i.e. contango), thus volatility should also move down.

I ask this question because i am thinking on some option strategies to be applied / backtested on seasonality of stocks or commodity futures, and I would like to have a position which, in case the price action goes wrong on direction at least will have an advantage on volatility. I was thinking to the following:
- Stocks (e.g. SPY): since in theory there is this inverse correlation btw price and volatility (as you mention not always, but we can say that in the majority of cases is observed), i am opening a option position which could be vega-negative if price goes down (against me) so that i will lose with direction but volatility is helping to hedge a bit the position (since in theory volatility goes down and this is good for the position).
- Commodity Futures (e.g. Cocoa, Soybeans, etc): here i am not so sure price and volatility are inversely correlated, thus my initial question. In case what i wrote above is correct, I should hedge with a vega-positive position instead of vega negative as in stocks case

 

[SunTrader]

Thank you very much, so if i understood well, your thesis is that volume is more correlated with volatility and there is direct correlation. Thus, there is no correlation at all between price and volatility in your opinion either for stocks either for commodities?

I ask this question because i am thinking on some option strategies to be applied / backtested on seasonality of stocks or commodity futures, and I would like to have a position which, in case the price action goes wrong on direction at least will have an advantage on volatility. I was thinking to the following:
- Stocks (e.g. SPY): since in theory there is this inverse correlation btw price and volatility (as you mention not always, but we can say that in the majority of cases is observed), i am opening a option position which could be vega-negative if price goes down (against me) so that i will lose with direction but volatility is helping to hedge a bit the position (since in theory volatility goes down and this is good for the position).
- Commodity Futures (e.g. Cocoa, Soybeans, etc): here i am not so sure price and volatility are inversely correlated, thus my initial question

There is no one size fits all, price and/or volume up volatility up or down vice versa as well. Each symbol has to be tested.

A stock or a commodity (low or high priced) stuck in a range will have low vol ...... right up until it breaks out up or down.

 

[2rosy]

I am saying commodities have shock events that cause them to go up. Some scarcity, weather, political, ... . When that happens panic ensues and volatility goes up. I never saw the reverse where supply miraculously doubles and price goes down. But oil went negative few years ago and I assume volatility went up

 

[TraDaToR]

I am saying commodities have shock events that cause them to go up. Some scarcity, weather, political, ... . When that happens panic ensues and volatility goes up. I never saw the reverse where supply miraculously doubles and price goes down. But oil went negative few years ago and I assume volatility went up

Bearish events occur on commodities ( Mississipi water levels making exports at the gulf impossible, refinery shutdowns during hurricanes that make crude stocks go upward...), but daily moves tend to be smaller. Nonetheless, volatility on the downside exists after a sustained bull market, when the "bubble burst". Down moves seemed to be as impressive as up moves.