From the December/January 2013 issue of Futures Magazine • Subscribe!

ETNs are made for spreads

Volatilities of gold, silver, wheat and corn futures and ETNs are shown on “December call options” (below). Silver and wheat have the highest option price curves on Sept. 21, 2012. These are followed closely by calls on December corn futures and much less closely by December gold futures. Having viewed these charts, which clearly show the relatively high volatility of silver, wheat and corn, it is not surprising that these three — with cumulative percentage price changes of up to 50% — leave gold behind with lower volatility.

The call price curves are regression equations that produce predicted prices that match options market prices at each strike price. Each symbol on the “December call options” chart represents a separate strike price. As shown, all call option prices occur along curves that are determined by the market’s assessment of the relative price volatility of underlying futures contracts. The result is a market forecast at each instant during the trading day of upper and lower breakeven prices at the expiration date. Breakeven prices are those that result in no gain or loss from a delta trade: Long call options and short the underlying futures.

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