Sep Corn

youngtrader · May 4, 2008

I want to start selling vol in sep or dec corn futures. Implied is currently around 45 right now and that is near the upper end of historical ranges.

I am thinking about purchasing a Sep 6.20/5.30 p 1x2 ratio spread. Correct me if im wrong but the greeks for this spread should be the following:

Delta .0261
Gamma -.1281
Theta .0012
Vega .0037

If I want my options spread to increase in value as vol declines shouldn't my vega be a negative number? Delta seems to be good when I am trying to stay delta neutral anyway. Theta doesn't seem to be a problem. What about my gamma? If its negative doesn't that mean that a big move in the underlying contract (sep corn) won't have that much of an effect on the delta of the spread? If so that seems to be in order.

What would you guys do different? Would you choose a different stratagy like a butterfly, time, strangle, straddle, etc? Would you choose different strike prices?

Any help you guys can give me would be great.

Thanks

YT

scriabinop23 · May 4, 2008

45% iv is not that much considering what is ahead for corn this next few months: 1) possible anti-ethanol subsidy legislation, and 2) from what I read, expected planting issues with upcoming crops due to adverse weather/moisture (what if that disappoints?)

Your spread benefits the most in a bullish or no move. I'm not a fan of ratio spreads in dealing with vol - they require you get price right to too high a degree.

If you truly want to sell vol, sell a strangle (ie sell sep 500, sep 700), or sell a covered strangle aka iron condor (ie -550/+500, -700/+750). Or get riskier, betting on a move it goes nowhere and sell either an atm straddle or a covered version, the iron butterfly.

Or if you want a limited risk way to bet on vol, but requiring the price to be near your strike, just buy a butterfly at your target. (ie long 1 550 call, short 2 600 calls, long 1 650 call). It should ramp up in value as vol declines, which I don't expect to happen.

youngtrader · May 4, 2008

Quote from scriabinop23:

45% iv is not that much considering what is ahead for corn this next few months: 1) possible anti-ethanol subsidy legislation, and 2) from what I read, expected planting issues with upcoming crops due to adverse weather/moisture (what if that disappoints?)

Your spread benefits the most in a bullish or no move. I'm not a fan of ratio spreads in dealing with vol - they require you get price right to too high a degree.

If you truly want to sell vol, sell a strangle (ie sell sep 500, sep 700), or sell a covered strangle aka iron condor (ie -550/+500, -700/+750). Or get riskier, betting on a move it goes nowhere and sell either an atm straddle or a covered version, the iron butterfly.

Or if you want a limited risk way to bet on vol, but requiring the price to be near your strike, just buy a butterfly at your target. (ie long 1 550 call, short 2 600 calls, long 1 650 call). It should ramp up in value as vol declines, which I don't expect to happen.

Thanks for the reply. I do however think that corn has the weather already priced in however the anti ethanol was not something I thought about.......good point though.

The spread benifits in a bullish or no move? I thought with it being a put ratio spread it would benifit in a bearish or no move. Also when would I want to buy that spread? When its near the 2 short legs or when its nearer the buy leg of the spread? I never thought of it before but it probably is better to buy these ratio spreads when ATM options are close to the 2 short legs.......that way you can capture the most premium right?

Selling strangles is basically the only way I have ever sold volatility in markets. I have no experience with trading ratios, calenders, butterflies, etc. If I were to sell the ATM straddle it would require constant delta hedging correct?

scriabinop23 · May 4, 2008

Quote from youngtrader:

Thanks for the reply. I do however think that corn has the weather already priced in however the anti ethanol was not something I thought about.......good point though.

The spread benifits in a bullish or no move? I thought with it being a put ratio spread it would benifit in a bearish or no move. Also when would I want to buy that spread? When its near the 2 short legs or when its nearer the buy leg of the spread? I never thought of it before but it probably is better to buy these ratio spreads when ATM options are close to the 2 short legs.......that way you can capture the most premium right?

Selling strangles is basically the only way I have ever sold volatility in markets. I have no experience with trading ratios, calenders, butterflies, etc. If I were to sell the ATM straddle it would require constant delta hedging correct?

oops. i misread the spread. yes, that likes bearish to no move. thats right. a settle at your short price would be optimal.

you could always leg in (playing it directionally on entry) or just enter the spread all at once.

if you sell the atm straddle, no it doesn't require hedging. its up to you to set your 'break point' where you exit the straddle outright or just hedge it dynamically.