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Commodity Volatility · Market Risk · Raw Materials · Short Volatility
Traders are increasingly betting against volatility in raw materials, a strategy known as "short vol," despite the commodity sector's historically volatile nature and ongoing geopolitical risks.
This trend mirrors broader global markets where macro volatility has been grinding lower. Factors like OPEC+ cuts, ample oil spare capacity, balanced copper demand, and healthy European gas stockpiles have kept prices range-bound.
Implied volatility for zinc is at a three-year low, and aluminum near a four-year low, while European natural gas volatility has returned to pre-Ukraine invasion levels. While this strategy offers returns in listless markets, it carries significant risks.
Geopolitical events, including Russia's ongoing invasion, Red Sea attacks, and global elections, could trigger sharp price swings, as evidenced by a recent copper rally. A build-up of short volatility positions could also exacerbate future market moves, as seen in a 2018 fund liquidation.
Gold and cocoa markets are notable exceptions, experiencing rising volatility and price swings.
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