Commodity Markets and Options Trading Strategies at The Chicago Board of Trade

Abstract

My internship in the summer of 2011 working for a trader of commodities options on the Chicago Mercantile Exchange illustrated the random and unpredictable nature of financial markets, particularly commodities markets. Commodities markets support the assertions of efficient market hypothesis and random walk theory, with past price movements having no effect on those of the future, and making it impossible to consistently predict the direction and speed of future price movements. The inability to anticipate price movements in commodities markets dictates the strategies that can be consistently used in trading options and futures within those markets. Given that such · uncertainty does exist in these markets, options traders are forced to use trading strategies that are not reliant on directional movements in underlying prices, or at least find ways to reduce exposure to the risks of volatile and unpredictable prices. The purpose of this paper is to demonstrate that movements in commodities prices are indeed random and cannot be predicted, and to illustrate the effect that this unpredictability has on the traders within these markets through discussion of the attitudes, strategies and practices that those traders use in response to it.