Low Vol, But Rising Prices Makes For Good Trading

Hey Traders,

As you may have noticed, we’ve been talking about gold a lot, in light of the new Basel III regulations that went into effect earlier this week. If you’re a Volatility Edge member, you may have even joined us on Thursday, when Bill Griffo announced the first of five “Griff’s Picks” he’ll be releasing this month to help us juice all the profits we can from the ramifications of this event, especially as it relates to commodities and volatility. 

But, of course, gold is far, far from the only commodity presenting some tempting trading opportunities right now.

In fact, it seems like the theme of the commodity sector these days is “high demand, low supply,” which, of course, bodes well for commodity prices.

Here’s how I’d play this trend.

Black Gold

As you may have noticed at the gas pump, oil has been hitting multi-year highs, with WTI oil climbing above $75 per barrel – its highest price since 2018. As the economy re-opens and travel returns to pre-pandemic levels, demand for the slick stuff is forecasted to continue to exceed demand, and US stockpiles are continuing to fall. Even if OPEC+ agrees to an output boost, it likely won’t be enough to fully offset the increased demand.

Of course, oil stocks are enjoying this tailwind. The Energy Select Sector SPDR Fund (Ticker: XLE) – which largely mirrors the movement of crude oil futures – is back to its pre-pandemic price, and individual oil stocks, like Exxon Mobil (Ticker: XOM) and Marathon Petroleum (Ticker: MPC), have followed suit. However, many oil tickers still haven’t reclaimed their 2018-2019 highs, so there may be plenty of room left to travel higher – especially if WTI hits the $100 per barrel that some analysts are forecasting.

Chart courtesy StockCharts

It isn’t just oil prices that are catching my eye … it’s oil option prices.

Like I’ve mentioned before, oil volatility is surprisingly low right now.

Chart courtesy StockCharts

The CBOE Crude Oil Volatility Index (Ticker: OVX), which tracks the implied volatility (IV) of at-the-money strikes for the U.S. Oil Fund ETF (Ticker: USO) remains quite muted, and this is carrying over into individual oil names as well. 

For example, XOM’s 30-day at-the-money IV is in just the 7th percentile of its annual range. Low IV is usually a good indicator that options prices are relatively cheap right now, so making bullish oil plays is an affordable way to play further oil upside.

Reap What You Sow

The uptick in travel is also pushing another commodity higher … corn, which is used for ethanol, is also seeing a rally, thanks to increased demand and a tight supply.

Corn and wheat are two commodities that have both seen plenty of 2021 upside, after reports that farmers planted less than estimated this year, coupled with rising demand, and lower-than-anticipated corn stockpiles.

Futures for the two commodities are often tightly linked, as both are used as animal feed, and farmers will replace one with the other depending on prices. Demand for both is expected to rise in the months ahead, although like I said, both have already seen a fair bit of upside over the last 12 months.

Charts courtesy StockCharts

Neither Teucrium Wheat Fund (Ticker: WEAT) nor Teucrium Corn Fund (Ticker: CORN) have exceptionally low IVs right now – in fact, CORN’s IV is in the 97th percentile of its annual range, indicating options prices are exceptionally expensive.

So instead of playing WEAT or CORN directly …

Let’s take a look at the world’s largest grain and corn processor … Archer Daniels Midland (Ticker: ADM).

Charts courtesy StockCharts

ADM has been notching a string of new all-time highs throughout late 2020 and 2021, though it has pulled back over the last several weeks. ADM’s 30-day at-the-money IV is in just the 11th percentile of its 52-week range, indicating options are especially cheap right now. If you’re looking for a bullish way to play corn or wheat, a low-cost play on ADM might be your ticket.

Or, if you’re looking for something a little meatier …


Don’t Be Chicken

Tyson Foods (Ticker: TSN) hasn’t really been having blockbuster year, weighed on by a post-COVID poultry shortage. Though the newly-appointed CEO has vowed to attack the problem head-on, there’s really only so much that can be done to offset production shortfalls in the near term.

Plus, an increase in live cattle prices, along with the higher corn and wheat prices, could also cut into TSN’s pork and beef profit margins.

Charts courtesy StockCharts

With volatility low, and earnings slated for next month, put-selling could be a valid way to play the temporary weakness in this name.

Your Only Option,

Mark Sebastian

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