As uncertainty continues to persist in commodity markets, traders are looking for ways to navigate an environment where new risks are emerging almost daily. More of them are looking for instruments of their choice in short-term options.
These options refer to a type of option that has a shorter term than traditional options, typically expiring monthly. In the oil market, WTI weekly options have become CME Group’s fastest-growing energy product, with record trading volumes.
WTI crude oil weekly options volume continues to break records.
Gold weekly options hit new 2023 highs
Trading volume of short-term agricultural options continues to hit new highs
Why have short-term options become popular?
Short-term durations provide traders with greater flexibility to adjust their portfolios more frequently in response to unexpected market events, regardless of their time horizon. Additionally, short-term options carry lower premiums because market conditions have less time to change. The increased interest and rapid adoption of short-term options can be primarily attributed to the following reasons:
Interest rates rise: The current economic environment is highly uncertain. Central banks around the world have begun raising interest rates to curb inflationary pressures, which have subsequently curbed investment and consumer spending. Additionally, high debt levels add another layer of uncertainty to economic conditions. These market conditions increase the volatility of commodity prices.
Weather events: Weather has increased volatility in some commodities, particularly soybean markets, with drought affecting harvests in 2023 in the United States and 2024 in Brazil. To illustrate this point, the chart below shows the heightened volatility in the soybean market, as reflected in the CME Group Volatility Index (CVOL). This tool measures the expected volatility implied by option prices based on collective market sentiment about future price movements.
Drought and weather events in major soybean-producing regions have triggered volatility in these markets.
Geopolitical risks rise: The Russia-Ukraine war has had a considerable impact on commodities and caused supply disruptions in oil, gas, corn and wheat. For example, in March 2022, oil prices reached $120 per barrel. In March 2022, wheat prices rose to $12 per bushel, while corn prices surged to $8 per bushel. Prices have since fallen, but are still higher than before the war. On the other hand, the Israeli-Palestinian conflict and Red Sea attacks are increasingly destabilizing the region and affecting oil prices.
WTI CVOL rises, shows traders brace for more turmoil in oil markets
New due date set list: The expansion of short-term options provides traders with more customization opportunities. This selectivity enables traders to reduce short-term risk from macro or specific commodity market events in a precise manner. Broad listings attract a broad range of market participants with varying risk profiles and trading strategies. Additionally, listing expiry dates more frequently enhances market efficiency and price discovery because the market has more data points to determine a fair price.
In the trading world, uncertainty creates a need for flexibility. Since commodities require managing a large amount of risk, activity in short-term options should continue to be an indicator of how traders view commodity markets.
