Cross Asset Volatility: What to Long, Short, and When - (Commodity Part I)

Research evidence excerpt

Cross Asset Volatility: What to Long, Short, and When - (Commodity Part I)

Yangyang Hou AC Global Markets Strategy

(1-212) 834-6734 17 July 2026 J P M O R G A N

yangyang.hou@jpmorgan.com

Brent Volatility Strategy At A Glance

For options on Brent, a volatility carry trade would have been very hurtful this year

unless balanced with a tail strategy. We conducted the full surface back test for a 15

year history of options at all maturities and delta strikes, assuming daily hedging at the

close and holding until a week prior option expiry. Costs are excluded to allow a cleaner

comparison between strategies.

Figure 3: Sharpe Ratio for Shorting Options with Delta Hedge at Figure 4: Average Implied Volatility at Different Tenors and Delta

Different Tenors and Delta Strikes Strikes

2011-2026 2011-2026

Tenor 5dp 10dp 25dp 50dc 25dc 10dc 5dc Tenor 5dp 10dp 25dp 50dp 25dc 10dc 5dc

2M 0.28 0.42 0.62 0.72 0.59 0.46 0.51 2M 44.01 40.02 35.97 33.65 32.98 34.91 37.71

3M 0.08 0.29 0.62 0.70 0.65 0.37 0.31 3M 43.95 39.97 35.78 33.28 32.35 34.09 36.69

6M -0.03 0.19 0.59 0.74 0.45 0.13 0.06 6M 42.74 39.21 35.13 32.30 30.65 31.97 34.16

12M -0.05 0.13 0.48 0.52 0.24 0.01 0.04 12M 39.75 36.81 32.99 29.96 27.56 28.57 30.43

Source: J.P. Morgan, Bloomberg Finance L.P. Source: J.P. Morgan, Bloomberg Finance L.P.

The initial findings are similar to what we see in equities, where regions of lower

implied volatility show better Sharpe ratio for carry (Figure 3SharpeRatioforShortingOptionswithDeltaHedgeatDiferentTenorsandDeltaStrikes). Higher volatility

wings looks optically more attractive, but the risk premium is well justified given that

realized volatility would overshoot when it gets there, causing large drawdowns (link).

6-12M wing strikes should be used as the tail solution instead.