Is The Market Really Sure About Its Direction?

Core Insights - The article discusses the importance of two volatility metrics, skew ratio and convexity, in understanding market sentiment and uncertainty [4][6][13] - It emphasizes that while skew ratio indicates potential market direction, convexity is crucial for assessing the cost of risk in out-of-the-money options [3][5][13] Group 1: Euro Futures Market - In early March 2025, the Euro futures market experienced a rally, with the skew ratio increasing from 0.90 to 1.05, indicating a bullish sentiment [5] - The rise in convexity during this period reflected increased uncertainty due to the introduction of tariffs [5] - By April 2025, convexity rose again, suggesting that the market was anticipating an imminent move, supported by the skew ratio indicating a likely upside trend [5] Group 2: Wheat Prices and Geopolitical Conflicts - Wheat prices surged from approximately $7.50 to over $9 per bushel amid the ongoing Russia-Ukraine conflict in October 2022 [8] - The increase in the skew ratio during this period reflected a bullish sentiment among traders [8] - However, the concurrent rise in convexity indicated growing uncertainty about the market's direction, with traders seeking protection against potential price movements [8] Group 3: Copper Market Dynamics - In April 2025, discussions around proposed copper tariffs led to increased market protection seeking, reflected in a rising skew ratio for front-month copper futures [11] - The simultaneous increase in convexity suggested conflicting sentiments in the market, as participants anticipated potential price increases while also hedging against uncertainty [11]