The strategy involves sorting 25 commodity futures contracts based on their options-to-futures volume ratio, going long on the lowest group and short on the highest, with weekly rebalancing.
ASSET CLASS: CFDs, futures | REGION: Global | FREQUENCY:
Weekly | MARKET: commodities | KEYWORD: Option, Futures
I. STRATEGY IN A NUTSHELL
The strategy trades 25 commodity futures across Agriculture, Energy, Livestock, and Metals. Using data from 65 days before options expiration (excluding the final week), it calculates the options-to-futures (O/F) volume ratio weekly. Commodities are sorted into eight groups by O/F ratio, going long on the lowest group and short on the highest. The portfolio is rebalanced weekly.
II. ECONOMIC RATIONALE
The O/F ratio signals informed investor activity: high O/F indicates negative news reflected in options, leading to short-term declines in futures returns, while low O/F signals positive expectations. This negative relationship between O/F and subsequent performance persists for over a week and remains significant after controlling for standard commodity factors like average excess return, carry, and momentum.
III. SOURCE PAPER
Trading Activity in Commodity Futures and Options Markets
Zhang, Tianyang [Click to Open PDF]
<Abstract>
Little is known about trading activity in commodity options market. We study the information content of commodity futures and options trading volume. Time-series tests indicate that futures contracts in a portfolio with the lowest option-to-futures volume ratio (O/F) outperform those in a portfolio with the highest ratio by 0.3% per week. Cross-sectional tests show that O/F has higher predictive power for futures returns than such traditional risk factors as the carry, momentum, and liquidity factors. O/F has longer predictive horizon for post-announcement returns than the information contained in the monthly World Agricultural Supply and Demand Estimates (WASDE) reports. The analysis of the weekly Commitments of Traders (COT) reports indicates that commercials (hedgers) provide liquidity to non-commercials (speculators) in short term in commodity options market.
IV. BACKTEST PERFORMANCE
| Annualised Return | 15.29% |
| Volatility | N/A |
| Beta | N/A |
| Sharpe Ratio | N/A |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
