There appears to be trouble with options volume at the Winnipeg Commodity Exchange.
While futures volume and open interest business has boomed this year compared to last, options business has slumped, frustrating farm marketing advisers who try to use the instruments for their clients.
“It’s just totally collapsed. There are no underwriters,” said Errol Anderson of Pro Market Communications, who likes options for crop risk management.
The WCE acknowledges the problem and wants to fix it.
“We have not been pleased with our options volume for quite some time,” said exchange vice-president Will Hill.
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“We are just having a lot of difficulty.”
Options are “call” and “put” contracts that allow buyers to obtain the right to buy or sell a commodity at a point in the future for a certain price. Unlike futures contracts, options contracts don’t lock in prices, but are like insurance to avoid price declines or to capture price increases. Many hedging strategies use options as part of a risk management approach.
But WCE options volume this November was almost 15 percent below the same time in 2005, and the open interest, which is the sum of contracts still existing in the market, had fallen by almost 25 percent.
That has some brokers and advisers avoiding the Winnipeg market’s option contracts. No one wants to get caught with a contract he can’t exit.
Some advisers have been using the Chicago Board of Trade soy oil options contract to hedge Canadian canola, rather than rely on WCE canola options.
People active in the Winnipeg market say the problem with options has many causes.
One is that the WCE lost a significant options trader in late 2004 when the exchange went all-electronic, so there is no longer a “market maker,” someone always willing to take the other side of a contract.
“We continue to have discussions on having somebody act as a market maker. We don’t have one, so our open interest has suffered as a consequence,” said Hill.
The small size of the Winnipeg exchange makes the search more difficult, but Hill thinks it will eventually find one.
Options volume has probably also suffered because of the move to electronic trade. Futures trade has boomed with the advent of electronic trading, which is easy to do on the computer screen, but options trading generally relies on the human touch.
Options are complicated instruments based on futures prices, so when futures prices change, so must options prices. And they rely on complex calculations that humans are often better at making on the fly, somewhat intuitively, than computers can make automatically.
Since the wide array of strike prices makes automatic order filling difficult, a human marketplace is still often considered essential for options trading.
“In the trading pit, if I wanted to buy a particular call option … I could send my trader into the pit and say: ‘I’ve got somebody who wants to buy these at this price.’ And instantly every options seller in the world becomes aware of that immediately (through their traders in the pit),” said Ken Ball of Union Securities in Winnipeg.
“But I can put it up on the board electronically and I have no idea if anybody’s even watching. Now you just hit the button and hope somebody’s watching.”
Another problem for options trade has been rising canola futures prices, with few gyrations. Options writers make money from the premiums they charge, and when there’s little price volatility, premiums tend to be small. That attracts few options writers.
“It’s been kind of a one-way street,” said Hill about canola’s price ascent. “That tends not to build options volume.”
Anderson has had to slash his options-based hedging because of the situation. At one time, more than 80 percent of his hedging was done with options, he estimated, but now it’s down to less than five percent.
He and Ball have recently seen more interest appearing in Winnipeg canola options, something they hope can grow so they can get back in.
