Winnipeg Commodity Exchange: Potential Opportunities In March Canola Options

Implied volatility at the daily close of trade for the at-the-money March 02 canola options has ranged between a high of 22.4% and a low of 16.0% since August 2001. During the same period, the underlying canola futures historical volatility (standardized to 20 trading days) has ranged from a high of 21.3% to a low of 8.4%. Both the implied and underlying historical volatility ended the month well within the ranges seen in the previous two years at 17.1% and 16.6% respectively.

Since August 1, 2001 a total of 29,492 canola options contracts have traded compared to 15,484 contracts during the same period a year ago. Open interest in canola options ended the month of November at 4,825 contracts with over half of the open interest in the March 02 contract. In particular, a significant portion of the March 02 canola options open interest is in the 340 puts and 340 calls. At month end, of the 2,594 contracts of open interest in canola puts, 1,559 contracts were open in the March 02 340 puts and of the 2,231 contracts open in canola calls, 1,120 contracts were open in the March 02 340 calls. A concentration of the open interest in the same strike price for both puts and calls could be an indication that some market participants are utilizing an options strategy called a straddle.

A long straddle is defined as the simultaneous purchase of a call and a put with the same strike price, the same expiration date and the same underlying futures contract. This strategy could be used when a significant move in the market is expected, however the direction of the move is uncertain.

A straddle has the potential for profit if the underlying futures market moves in either direction, as long as the market continues to move in the same direction. If the market moves up and the call is in-the-money, the call would be sold or exercised and the put would expire worthless. If the market moves down and the put is in-the-money, the put would be sold or exercised and the call would expire worthless.

The more the underlying futures market moves in either direction, putting either the put or the call deeper in-the-money, the more potential there is for profit with this strategy. The worst case is if neither the put nor call are in-the-money at expiration and both would expire worthless and the full cost of the straddle would be lost.

In contrast to a long straddle, a short straddle assumes that volatility is going to remain constant and prices generally unchanged.

Given enough interest, WCE will be offering an intermediate/advanced options course in March/April 2002. Anyone interested in taking this options course should contact WCE at +1 204-925-5000 ext. 5041.