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Option combination strategy under the moderation of iron ore rally: the demand for put options is more exuberant
Jul 29,2020 10:19CST
Source:Futures daily
The content below was translated by Tencent automatically for reference.

SMM News: a New Angle of View of Iron Ore rising Analysis

In the process of the early rise in iron ore, the supply side repeatedly hyped the subject matter, mainly Australian hurricanes and torrential rains in Brazil at the beginning of the year, causing iron ore shipments in Australia and Brazil from January to February to reach the lowest level since last year. During the same period, although domestic crude steel production declined due to the COVID-19 epidemic, it was mainly through electric furnace supply compression, and the blast furnace was relatively less affected, supporting mineral prices.

Australian shipments resumed quickly after March, but Brazilian shipments recovered slowly and remained low in March, with monthly shipments significantly lower than in the same period last year. Although Brazilian shipments have increased overall after April, the pace is repeated. Brazilian shipments were at a low ebb in April last year due to the dam break, and if you exclude the impact of April outliers, Brazilian shipments in the second quarter of this year are still lower than in the same period last year. As for the reasons behind the continued downturn in Brazilian shipments, the impact of the COVID-19 outbreak in the region is particularly critical. From the trend of the number of new confirmed cases in Brazil, we can see that the number of new confirmed cases in Brazil entered an accelerated growth period after May, with the cumulative number of confirmed cases exceeding 100000, and the cumulative number of confirmed cases jumped to the second place in the world after June, second only to the United States. In such an environment, the resumption of production in the mine is beset with difficulties.

On May 14th, the news that Vale's operating license was revoked in the Brazilian city of Brumadino, which broke its dam last year, became the trigger for accelerating the rise in iron ore prices. On June 6th Vale officially announced that it would suspend operations at the (Itabira) integrated mine in Itabila on June 5th, and there was a lot of material on the iron ore supply side.

Up to now, the theme of iron ore supply shortage and the rising pace are similar to those of last year, although history will not be simply repeated, but through comparison, we can have a clearer understanding of the main contradictions and operating characteristics behind the market. Below, we compare the key supply and demand data of iron ore to summarize the similarities and differences between this year's fundamentals and last year. From the perspective of iron ore supply, although Brazilian shipments are low this year, Australia's shipments after March are more sufficient. According to the data caliber of Steel Silver, from January to mid-July this year, Australia's shipments to China and Brazil totaled 542.75 million tons, compared with 545.66 million tons in the same period in 2019, compared with a modest supply reduction this year.

In terms of iron ore demand, from the comparison of the average daily hot metal output of 247 steel mills across the country, it can be found that hot metal output rebounded rapidly after April and reached a new high in May. Behind this is the strong recovery of steel demand after the domestic epidemic has been brought under control: on the one hand, the project is catching up with the progress; on the other hand, under the steady growth, the demand for infrastructure represented by Xiongan area has soared. It is shown by the relatively fast speed of removing storage and the stronger price of building materials in North China.

According to the import data of the customs, China imported 87.026 million tons of iron ore in May this year, an increase of 3.276 million tons over the same period last year, an increase of 3.9 percent, a decrease of 8.686 million tons compared with April and a decrease of 9.07 percent from the previous month. Iron ore imports also dropped month-on-month in May when hot metal production was at a new high and the demand for iron ore increased, so it is not difficult to understand this wave of rise.

B iron ore demand is more resilient in the future

But things are starting to change marginally. First of all, steel demand has declined since June. Due to the high temperature and heavy rain in summer, steel demand usually shows the seasonal characteristics of weakening after the peak season of March-April. This year, as the epidemic disrupted the rhythm, steel demand did not return to normal until after April, and the peak season was postponed. But after June, steel demand began to decline from a high level, and the apparent demand for threads in the latest week has fallen from an all-time high of 4.78 million tons to 3.5734 million tons.

The decline in demand is mainly suppressed by two aspects: one is the high temperature in the north and the off-season of plum rain in the south; the other is that the demand returns to normal intensity after the rush to work. From the June real estate data just released by the Bureau of Statistics, the data continue to recover from the same period last year, and there is little pressure on real estate funds, but the growth is not significant compared with the same period last year. Among the data of real estate, the data with the highest correlation with steel demand are the data of new construction area and construction area. Considering the low accuracy of the data of construction area, the cumulative value of the rolling summation of the new construction area of real estate for 12 months is used to fit the steel demand under construction. From January to June this year, the cumulative value of the index slightly increased from-0.01% to 0.07% from-0.01% last month, with a small increase. The apparent demand for thread cycle reported by Mysteel reached an average of 4.52 million tons from April to May this year, an increase of 9% over the average in April last year. The huge gap between the two may be due to the epidemic disrupting the pace of the project.

This year is the year of housing delivery. As we all know, many short-term houses have been sold from 2016 to 2017. Under the high turnover strategy of developers in recent years, more new construction has been started than construction, resulting in a relatively slow increase in the area of real estate completed, but the construction can not be delayed all the time. So in the second half of 2019, we have seen an accelerated rebound in completed area. After the beginning of the year, due to the epidemic, a large number of buildings were shut down, and developers will naturally choose to speed up work after the epidemic to make up for the construction period when they are faced with concentrated house delivery this year, and it is likely to speed up the construction progress per unit area through shifts and other ways, which leads to a huge difference between the statistics bureau data and the high-frequency thread apparent demand data. However, after the end of the rush period, the gap between the two will narrow, according to the Bureau of Statistics, assuming that the real estate demand after the rush is only slightly higher than the same period last year, the threaded table is unlikely to maintain its current intensity in the medium term. At present, it is expected that the steel demand will return to a higher level after the off-season weakening, and it will help to support the iron ore demand in the later stage when the toughness of the actual steel demand is in line with expectations. On the contrary, if the recovery of steel demand in the future is not as strong as expected, there may be expected repair demand.

Second, although there is a disturbance of the epidemic this year, under the circumstances that the recovery of consumption and manufacturing is still under great pressure, there is a demand on the policy side to maintain a loose monetary policy, and with the improvement of the financing environment, steel mills also have the motivation to maintain high output when steelmaking profits are always small. In this context, the output adjustment of steel mills is relatively slow, and crude steel output remains high for a long time, but crude steel output failed to maintain a new high after July, and then we need to pay attention to the extent and persistence of the decline in steel production and demand. if the decline in steel demand is not sustained, the future toughness of iron ore demand is still strong.

Finally, iron ore supply continues to rise month-on-month, and although the current recovery is not enough to reverse the tight pattern, uncertainty on the supply side is likely to increase in the medium term. Since June, the weekly average of Australian shipments to China and Brazil has rebounded from about 9.7 million tons in May to about 11 million tons. After July, it declined from the previous month but remained above 10 million tons. Since late June, iron ore port inventories have stopped falling and rebounded, and the recent growth rate has increased. With reference to last year's market, under the premise that there is no inflection point in the port inventory and the shipping volume does not continue to rise, there is little probability that the price will change from rising to falling. However, if the port inventory continues to be burdened in the later period, and the weekly shipping capacity of Australia and Brazil can be maintained at more than 10.5 million tons, the shortage of iron ore supply will tend to be alleviated. After the rise slows down, iron ore prices may turn to high oscillations.

What needs to be vigilant in the medium and long term is that Brazil has experienced the impact of the epidemic this year, and its domestic economy is also under tremendous pressure. Although iron ore shipments have not fully returned to normal so far, Vale has not further lowered its annual production target of 310 million-330 million tons, and it still cannot completely rule out the possibility of Brazilian shipments after the epidemic has been brought under control. In this regard, we need to carry out continuous tracking.

Interpretation of important data of C Iron Ore option

Since the iron ore option was officially listed on the Dalian Commodity Exchange on December 9, 2019, to July 24, 2020, the daily position of varieties is currently near the highest level of 254000, and the liquidity and scale of varieties have expanded. Among them, the position of call option is 84800, the highest daily position is 109000, and the position of put option is 169000, which is at the highest level in history. compared with the demand for put option, the demand for put option is more exuberant.

Since the beginning of July, daily trading volume has increased, and the turnover rate has increased. From the point of view of the concentration of chips, in the iron ore 2009 main option contract, the positions of call options are highly concentrated at 830 yuan / ton exercise price, reaching tens of thousands of positions, followed by 850 yuan / ton exercise price position, up to more than 7100; On the other hand, the put options have more than 4000 positions and more than 5000 positions in the two exercise prices of 800yuan / ton and 750yuan / ton respectively, which shows that there is a strong support level expected by the market near 750yuan / ton. while the top 830yuan / ton and 850yuan / ton are the key resistance levels.

We often say that spot, futures and options are different angles from which we observe the underlying assets. if futures provide us with a two-dimensional perspective of the forward market through different maturity contracts, then options upgrade the perspective from two-dimensional to three-dimensional. Options are composed of multiple exercise prices and different expiration dates, which provide us with more details. Take the common PCR index of position as an example, which is the ratio of the position of the right contract in the bearish period to the position of the call option contract. Because the seller needs to pay margin when trading options, it is generally considered to be the stronger party and usually has higher accuracy. When the market rises, the seller will dare to sellput (long), the number of positions in the bearish period will increase, the PCR will increase, and vice versa. From the PCR index of iron ore options, the index continued to oscillate after breaking through 100% in this rally, which is in line with the performance of the bull market, but failed to follow the record high in the later stage of iron ore futures prices after reaching a peak of 244% on May 26, indicating that the participation of bullish forces is not as good as that of the previous period.

There is also a key indicator that can not be ignored in options-implied volatility, which is based on the current price of the underlying asset options to calculate the volatility, to express the market expectations of future volatility. High implied volatility indicates that the underlying assets are expected to fluctuate greatly in the future, while low implied volatility indicates relatively robust price changes expected by the market. From the implied volatility surface of iron ore option contracts with different exercise prices on different maturity dates on July 24, we can see that the surface is generally smooth, and there are no abnormal protruding and sunken points, which shows that the current iron ore option pricing is more reasonable. In addition, the implied volatility of option contracts with the same strike price and the farther the maturity date is higher, indicating that the market expects that with the passage of time, the volatility of iron ore prices will expand, while the risk of volatility in recent months is smaller. For the most liquid iron ore 2009 options contracts, the implied volatility of equal value options is around 28%, which is higher than that of other listed industrial options, which is consistent with the high volatility of iron ore prices this year. From a structural point of view, the implied volatility of the iron ore 2009 option in the range of 700murl 850 yuan / ton exercise price is within the range of 25% muri 32%, and the imaginary put option is slightly on the high side. The volatility of deep virtual put options is as high as more than 50%, so one-way buying should be avoided.

D can try the wide-span consolidation strategy.

According to our judgment on the weakening of the edge of iron ore supply and demand, the short-term upward power of iron ore has weakened in the future, but the output of hot metal remains high for the time being, and the falling space is also limited. Combined with the current situation of high implied volatility in options, it is more suitable to be a seller. It is suggested that we can try the wide-span consolidation strategy to sell iron ore 2009 of the strike price call option at the same time, sell the same amount of iron ore 2009 about 750RMB / ton strike price put option.

Assuming that the strategy enters early trading on July 24, the profit and loss chart of the strategy is as follows: the horizontal axis represents the price of iron ore 2009 futures at maturity, and the vertical axis represents the strategic profit and loss under the corresponding price. On July 24, there are only 10 trading days left on the remaining expiration date of the iron ore 2009 option contract. if the price of iron ore 2009 fluctuates between 750 million and 830 yuan / ton before maturity, you can get a total profit of about 21 yuan / ton from the two-leg right deposits. under this strategy, the margin is charged unilaterally on the higher side, and the yield is about 25 per cent if the margin ratio is estimated at 10 per cent. under this strategy, the margin is charged unilaterally on the higher side, and the yield is about 25 per cent if the margin ratio is estimated at 10 per cent. However, if the maturity price breaks through more than 844.4 yuan / ton up or more than 735.6 yuan / ton down, it will face losses. In the process of holding positions, rising volatility and price fluctuations may lead to floating gains or losses, and the price of options fluctuates violently. The seller's strategy especially needs to do a good job in position control, and it is recommended that the position should not exceed 10%. In the stop-loss strategy, if we break through the 830yuan / ton mark upward in the future, then the flat iron ore 2009 will be about 800yuan / ton strike price call option, and move the position to 850yuan / ton strike price call option; if we break through 750yuan / ton downward, it means that significant changes may take place in iron ore fundamentals, so we can close the position and stop losses and consider buying put options.

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