Selling Pmax Time Value To Buy Cape Volatility


With implied volatility in the Capesize sector being historically higher than that of the Panamax, this note observes and highlights their behavioural patterns (via the spread) after an expiry. Current Capesize Q4 implied volatility is at 103.7%. This is nearly twice that of the Panamax Q4 implied volatility which is at 53%.

Exhibit 1 illustrates the implied volatility differential between the Capesize 2 quarters forward, and the Panamax 2 quarters forward. Therefore the current spread in play will be on the Q4 expiry. The spread has a tendency to widen atier the previous quarter expiry (rollover). Since January 2014 we have seen a positive return on 90% of the rollovers. The buyer of the spread benefits from a long Vega position, whilst having a reduced Theta position (about 1/3 less) due to the Panamax short.


Current volatility in the Cape index

Exhibit 2 illustrates the Capesize index with a 21 period moving average and a 2% standard deviation Bollinger Band around it. The bands are very useful in helping to predict volatility movements as they expand and contract.

Bollinger concluded that volatility cycles were more stable to predict than market cycle’s themselves. He also concluded that low volatility was followed by high volatility, and therefore as the band width contracted the market should prepare itself for a jump in volatility, and an increase in the width of the bands.

The band width is illustrated on the bottom window of the chart, the band itself is currently on historical lows. This would suggest that the next move in volatility will be to the upside.



The cyclical – and logical – nature of the spread is to widen after the rollover. This, in conjunction with the volatility band measurement, which are on their historical lows would suggest that the statistical likelihood is that we should see a con#nua#on of the current trend, and a widening of the spread.

For those wishing to increase exposure in the spread by reducing their Theta further, there is the option for a ratio trade, by selling some more of the Panamax options. The downside of this is that you would be dealing with a negative Vega position (negative Gamma), meaning the spread would need to widen considerably.

Source: FIS

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