By Kim Pike
Last month the number of electronically traded option contracts hit all-time highs for CME corn (1,382,499), soybeans (767,773), and wheat (248,582). New highs were also reached for the percentages of electronically traded option contracts in corn (39.24%), soybeans (31.23%), and wheat (40.1%).
Volume in grain options has increased dramatically this summer, largely in response to the drought. For the month of July, corn option volume was up 57.9%, wheat option volume was up 72.4% and soybean option volume was up 145.3% from year-ago levels.
By comparison, volumes for corn, wheat and soybean futures grew only about half as much: 33.3%, 41.4% and 52.6%, respectively. Futures volumes in July were almost entirely electronically traded, with over 96% for both corn and soybeans and over 98% for wheat.
“For total trading volumes, I think we have only begun to scratch the surface in terms of the things that can be done with options,” said Dr. Paul Peterson, professor of Derivatives Trading in the department of Agricultural and Consumer Economics (ACE) at the University of Illinois at Urbana-Champaign. “There are only so many things you can do with futures, and this is true whether you’re a hedger or a speculator. But with options there are strategies that can be used to capitalize on nearly any market situation, and I believe the rate of growth for option volumes will continue to outpace the rate of growth for futures volumes.”
For many years, the dominant use of corn was livestock feeding. Ethanol production has grown from zero to what is currently projected at 40% of corn usage, with livestock feeding at 35%, and the rest going into food, seed, and industrial uses as well as exports. With this year’s drought there are fewer bushels available, so the competition between ethanol and livestock this year has been described as “fierce”.
“This has been a game-changer for the corn market, and has also affected the soybean and wheat markets,” noted Dr. Peterson. “Higher prices and increased volatility have driven much of the volume growth that we’ve seen this summer, particularly in options.”
CME Group recently expanded their grain trading hours in order to compete with Intercontinental Exchange (ICE), which will be entirely electronic beginning in mid-October. The announcement of longer trading hours by CME has ruffled some feathers on the floor, but is believed by many industry observers to usher in a welcomed increase in volume, particularly from other time zones previously constrained by Chicago trading hours.
“This is probably just the beginning,” notes Dan Passarelli, an options educator and founder of Market Taker Mentoring LLC, previously a market marker at the Chicago Board Options Exchange. “We’ve seen what happened in the securities options market just over a decade ago when multi-exchange competition was introduced. The exchanges began reacting to competitive forces and never looked back. My prediction is that we will see more electronic trading, tighter markets, deeper markets, and greater volume.”
Dr. Peterson believes longer trading hours simply acknowledge the global nature of the grain and oilseed markets, “While a longer trading day may not appeal to US traders, anything that makes it easier for overseas entities to use these markets will enhance the price discovery function of futures and options, and better price discovery benefits everyone.”
