Predicting Implied Volatility in the Commodity Futures Options Markets

Abstract

Academics and practitioners have substantial interest in the implied volatility patterns recovered from commodity futures options. Such knowledge enhances their ability to accurately forecast volatility embedded in these high-risk options. This paper reviews option-implied volatility in the September corn futures option contracts for the period of 1991-2000. It also investigates whether a “weekend effect” exists. We compare forecasting performance of different historical volatility measures. We further report average trading profits of a short straddle strategy, which is motivated by differences between option implied volatility and historical volatility. JEL Code: G10, G12, G13