Why Soybean Oilshare Is Not Linear

Oilshare is the share of the revenue from crushing soybeans that is attributable to soybean oil and is defined as:

Where:
BO = The price for the referencing Soybean Oil futures contract
SM = The price for the referencing Soybean Meal futures contract

For example, with a Soybean Meal futures price of $286.90 per short ton and with a Soybean Oil futures price of 41.72 cents per pound (or dollars per hundredweight), the soybean oilshare is 42.10%. For a more detailed explanation for calculating oilshare, please see What is Oilshare?

The difficulty of trading oilshare is that there is not a one-to-one relationship between how the value of oilshare changes compared to how oilshare is replicated with Soybean Oil and Soybean Meal futures positions. That is, for a given oilshare value, how that value reacts within Soybean Oil and Soybean Meal positions differs based on the underlying price levels. An example will help clarify.

Assume that Soybean Meal (SM) is trading at 230 per ton and Soybean Oil (BO) is trading at 27.60 cents per pound. Oilshare is calculated as:

Now assume that BO rises by 10 ticks from 27.60 to 27.70 while the price of SM does not change. Someone with long BO positions and a short SM position on will gain $60 per BO contract since only the price of BO has moved (by 10 ticks) and each tick is valued at $6. 

Meanwhile, the value of oilshare has also moved:

In summary, the value of oilshare has moved up by 0.0848% and the value change in an BO/SM spread has increased in value by $60.

Now assume differing price levels with SM trading at $430 per ton and BO trading at 51.60 cents per pound. As before, oilshare is 37.5%:

As in the previous example, assume that BO rises by 10 ticks from 51.60 to 51.70 while the price of SM does not change. Just as before, someone with long BO and short SM position(s) will gain $60 per BO contract. However, at the different price levels in the second example, the 10 tick move in the price of BO has a different impact on the value of oilshare. Oilshare is now:

For this second example, the value of the change in BO versus SM is, again, $60 just like in the first example. However, at the higher underlying prices, oilshare has only moved by 0.0454%. That is, oilshare does not have a linear relationship with underlying Soybean Oil and Soybean Meal futures prices.

As shown above, how oilshare values change is based on underlying price levels. A given change in underlying prices at one set of prices implies a different impact to oilshare compared to an exact change in underlying prices at a different set of prices. Logically, at low price levels a given change in the price of BO is a greater percentage than the exact same change in the price of BO when price levels are high. 

To account for the non-linear relationship between changes in the value of oilshare and the profit and loss from a BO/SM spread, some oilshare traders continually adjust how many BO contracts they own relative to meal contracts based on the current value of oilshare. These continual adjustments allow the value of the BO/SM spread to represent changes to the value of oilshare. The downside to this approach is that it requires constant monitoring and adjustment, something not all market participants interested in the relative value of soybean oil versus soybean meal might want to take on.

A simpler alternative some traders employ is to trade Soybean Oil and Soybean Meal futures in a fixed combination such as five (5) Soybean Oil futures contracts versus three (3) Soybean Meal futures contracts. The benefit of this simpler approach is that a one tick move in either Soybean Oil futures or Soybean Meal futures is worth $30 ($6 per tick per contract * 5 contracts for soybean oil and $10 per tick per contract * 3 contracts for soybean meal). However, the disadvantage, as illustrated in the examples above, is that a five soybean oil by three soybean meal spread does not match-up with soybean oilshare in a linear fashion.

We are happy to introduce CBOT Soybean Oilshare futures and options, which provides a cash settled and linear relationship between open positions and the value of oilshare.

The contract will trade oilshare values with a tick size of 0.025. For example, the tradeable values of 38.000, 38.025, 38.050 and 38.075 represent oilshare values of 38.000, 38.025, 38.050 and 38.075 percent, respectively. The contract size is 400 points. This means that for each 0.025 change in the value of oilshare will be worth 400 * 0.025 = $10 per CBOT Soybean Oilshare futures contract. 

The contract is cash settled to maintain the same linear relationship between trading returns and oilshare regardless of underlying prices. This is also the same expiry date as standard options on Soybean Oil and Soybean Meal futures.

CBOT Soybean Oilshare futures and options will settle on the last Friday preceding two business days of the month prior to the listed contract month. While Soybean Oilshare futures and options will expire into the future, Soybean Oilshare futures will financially settle to the CME Soybean Oilshare Index®, administered daily by CME Benchmark Administration. The CME Soybean Oilshare Index® is calculated using daily settlement prices for Soybean Oil and Soybean Meal futures using the first formula above, forming a forward curve nine months out.

For more information on Soybean Oilshare futures and options, see An Introduction to Soybean Oilshare Futures and Options (replace with URL) and Soybean Oilshare futures and options