Commodity Option Implied Volatilities and the Expected Futures Returns

74 Pages Posted: 24 Mar 2017 Last revised: 6 Mar 2019

See all articles by Lin Gao

Lin Gao

Luxembourg School of Finance; Universite du Luxembourg

Date Written: November 12, 2017


The detrended implied volatility of commodity options (VOL) forecasts the cross section of the commodity futures returns significantly. A zero-cost strategy that is long in low VOL and short in high VOL commodities yields an annualized return of 12.66% and a Sharpe ratio of 0.69. Notably, the excess returns based on the volatility strategy emanate mainly from its forecasting power for the future spot component, different from the other commodity strategies examined so far in the literature which are all driven by roll returns. This strategy demonstrates low correlations (below 10%) with the other strategies such as momentum or basis and performs especially well in recessions. Our results are robust after controlling for illiquidity, other commodity pricing factors, and exposure to the aggregate commodity market volatility. The VOL measure is associated with hedging pressure on the futures and especially on the options market. News media also helps amplify the uncertainty impact. Variables related to investors’ lottery preferences and market frictions are able to explain part of the predictive relationship.

Keywords: commodities, option-implied volatility, uncertainty

JEL Classification: G12, G13

Suggested Citation

Gao, Lin and Gao, Lin, Commodity Option Implied Volatilities and the Expected Futures Returns (November 12, 2017). Available at SSRN: or

Lin Gao (Contact Author)

Universite du Luxembourg ( email )

L-1511 Luxembourg

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics