Predicting implied volatility in the commodity futures options markets

• Main Authors: Ferris, Stephen, Guo, Weiyu, Su, Tie
• Format: Article
• Language: English
• Published: Universiti Utara Malaysia
• Subjects: HC Economic History and Conditions
• Online Access: http://repo.uum.edu.my/336/1/Stephen_Ferris.pdf; http://repo.uum.edu.my/336/; http://ijbf.uum.edu.my/

Both academics and practitioners have a substantial interest in understanding patterns in implied volatility that are recoverable from commodity futures options. Such knowledge enhances their ability to accurately forecast volatility embedded in these high risk options. This paper examines option-implied volatility contained in the heavily traded September corn futures option contracts for the ten-year period, 1991-2000. We also test whether a "weekend effect" exists in the market for these contracts. We evalu- ate the performance of various measures widely employed in the literature to estimate historical volatility. We further report the nature of profits from a short straddle strategy which seeks to exploit differences between option-implied and historical volatility