How trading in commodity futures option markets impacts commodity futures prices

This paper investigates the information content of the futures option markets trading activities in determining commodity futures returns. Our findings suggest that position changes in the commodity futures option markets provide incremental predictive power for commodity futures returns in addition to the effects of commodity futures markets position changes. Particularly, for both commercial traders and noncommercial traders, options position changes impact the futures price in the same direction as futures position changes. Furthermore, the nonmomentum of position changes of options market contributes overwhelmingly relative to the idiosyncratic risk and hedging pressure in the case of noncommercial trading.

Automated summary

This paper finds that trading activities in the futures option markets have incremental predictive power for commodity futures returns, particularly for both commercial and noncommercial traders. The nonmomentum of position changes in the options market has a significant impact on noncommercial trading compared to idiosyncratic risk and hedging pressure.