A Look at Nascent Chinese Commodity Options

Big numbers for white sugar, soybean meal and copper options volumes

Spencer Doar

Spencer Doar

Editor

It’s already a record year for U.S. listed options volumes and there are still two weeks of trading left to go. The OCC isn’t the only clearing house with volumes surging – China’s nascent options on futures products are doing well, too.

Over the past two years, three options on futures contracts have debuted as China’s exchanges  continue to push their listed-derivatives frontiers.

Dalian Commodity Exchange (DCE) was first to the options on futures party with soybean meal options launching in spring 2017. Second into the fray in spring 2017 was the Zhengzhou Commodity Exchange (ZCE) with its white sugar options. The most recent options entrant was the the Shanghai Futures Exchange (SFE) which launched copper options in September.

(Reuters reported in September that the next likely product on the horizon is iron ore options at DCE.)

The FIA released its monthly dataset on global exchange-traded futures and options activity for November, which provided an opportunity to look at some recent activity.

Copper options at SFE compete internationally with offerings at COMEX and the LME. The LME traded 142,853 copper options contracts in November, and 40,977 traded hands at COMEX. Meanwhile, 406,794 traded at the SFE. This isn’t an apples to apples comparison, as the underlying futures contract at SFE is for less than half as much copper as its U.S. counterpart, and roughly a fifth that of the LME’s contract, but notable nonetheless for a product in its infancy. The young Chinese challenger is short on open interest, though – it stood at 30,160 at the end of November compared to the LME’s 111,270.

The story around sugar and soymeal is equally encouraging for the Chinese exchanges.

Dalian’s obvious soybean meal options rival is traded at the Chicago Board of Trade (CBOT).  The CBOT traded 143,512 soymeal options in November and DCE posted 1,574,202. The CBOT’s underlying futures contract is for nine times as much meal, but even with that math in mind DCE’s volumes represent more beans.

As for ZCE’s sugar options contract, it butts heads with ICE Futures U.S.’s offering. This is the only contract where the entrenched competition still looks dominant. Both exchanges traded in the 500k contract range but ICE’s underlying represents five times more sugar.

These three options contracts don’t even have two years under their respective belts (barely three months for the copper contract!) and are already putting up big numbers. It bodes well for the further expansion of China’s listed options industry.

(Editor’s note: The options volume figures for LME, CBOT and ICE do not include weeklys or other respective commodity variant options contracts.)

January to November 2018 Chinese Options Volumes

Edited by Sarah Rudolph

.

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A Look at Nascent Chinese Commodity Options

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Spencer Doar

Spencer Doar

Editor

On the 30th anniversary of the ‘87 market crash last week, Cboe, in collaboration with ProShares, hosted a panel discussion “Current Dynamics of the VIX Market.” There was a lot to glean – from the applications of VIX ETPs to unique characteristics of VIX futures to general perceptions of volatility.

Dominic Salvino, Group One’s VIX options specialist, had an analogy for the current low levels of VIX, comparing it to high February temperatures in Chicago. On February 18, the thermometer reached 70 degrees Fahrenheit, only the fourth time that’s happened since 1971. Is that weird? Yes. Is it worth noting? Yes. Does that mean that the thermometer is broken? No. The thermometer is simply reading the conditions in the same way it always has.

On the topic of ETPs, there were a couple of notable points. Rich Ledee, ProShares’ head of capital markets, was quick to compliment the success of Barclays’ volatility ETNs, specifically VXX, the bank’s short term VIX futures note, but also brought up a couple of idiosyncrasies of the product. First, VXX has a maturity date at the end of January 2019. (You read that right – prospectus here.) There is a lack of clarity on the Street around what will happen at that juncture regarding the note. There will likely be a creation of a new product and some sort of transfer but the prospect is a can of worms worth keeping an eye on. Second, by nature of being an ETN issued by a bank, there is counterparty credit risk and less transparency to consider which is different from ETFs (which is also why some folks are more leery about trading ETNs).

Second, there is a perception that VIX-linked ETPs are the dominion of the day-trading retail crowd. However, panelists were quick to turn that notion on its head stating that there are large institutional players (and plenty of prop shops) using these and, moreover, buying and holding these products despite the cost of carry. The Ontario Teachers’ Pension and the University of Chicago’s endowment were two such players mentioned.

There has been much ado about the effects of an unwind of all the short vol positions, but the sentiment of the panel was those fears are overblown.

The VIX is calculated off of calendar days rather than trading days, so there is an impact when a month has more holidays (this is priced in and not a trading opportunity).

The VIX may be low, but Cboe’s SKEW Index is elevated.

This was not the first time someone has brought it to light, but Anand Omprakash, director, equity derivatives strategy and structure for BNP Paribas, had a great chart overlaying the VIX with varying QE implementation periods. It’s hard to look at that chart and then try to argue that central bank actions have not had a dampening effect on market volatility.

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It’s already a record year for U.S. listed options volumes and there are still two weeks of trading left to go. The OCC isn’t the only clearing house with volumes surging – China’s nascent options on futures products are doing well, too.

Over the past two years, three options on futures contracts have debuted as China’s exchanges  continue to push their listed-derivatives frontiers.

Dalian Commodity Exchange (DCE) was first to the options on futures party with soybean meal options launching in spring 2017. Second into the fray in spring 2017 was the Zhengzhou Commodity Exchange (ZCE) with its white sugar options. The most recent options entrant was the the Shanghai Futures Exchange (SFE) which launched copper options in September.

(Reuters reported in September that the next likely product on the horizon is iron ore options at DCE.)

The FIA released its monthly dataset on global exchange-traded futures and options activity for November, which provided an opportunity to look at some recent activity.

Copper options at SFE compete internationally with offerings at COMEX and the LME. The LME traded 142,853 copper options contracts in November, and 40,977 traded hands at COMEX. Meanwhile, 406,794 traded at the SFE. This isn’t an apples to apples comparison, as the underlying futures contract at SFE is for less than half as much copper as its U.S. counterpart, and roughly a fifth that of the LME’s contract, but notable nonetheless for a product in its infancy. The young Chinese challenger is short on open interest, though – it stood at 30,160 at the end of November compared to the LME’s 111,270.

The story around sugar and soymeal is equally encouraging for the Chinese exchanges.

Dalian’s obvious soybean meal options rival is traded at the Chicago Board of Trade (CBOT).  The CBOT traded 143,512 soymeal options in November and DCE posted 1,574,202. The CBOT’s underlying futures contract is for nine times as much meal, but even with that math in mind DCE’s volumes represent more beans.

As for ZCE’s sugar options contract, it butts heads with ICE Futures U.S.’s offering. This is the only contract where the entrenched competition still looks dominant. Both exchanges traded in the 500k contract range but ICE’s underlying represents five times more sugar.

These three options contracts don’t even have two years under their respective belts (barely three months for the copper contract!) and are already putting up big numbers. It bodes well for the further expansion of China’s listed options industry.

(Editor’s note: The options volume figures for LME, CBOT and ICE do not include weeklys or other respective commodity variant options contracts.)

January to November 2018 Chinese Options Volumes

Edited by Sarah Rudolph

.

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