Fig. 1: Illustration of why options capture the value of seasonal outlooks.
From: Financial markets value skillful forecasts of seasonal climate
This example depicts a seasonal climate that can have only two possible weather outcomes (extreme weather or absence of extreme weather, leading to a stock price of either $30 or $90) and an outlook that will provide one of two, equally likely forecasts (leading to a stock price of either $70 or $50). Stdev_pre is the standard deviation of stock prices once the seasonal climate is realized, evaluated before the seasonal outlook is released. Stdev_post is evaluated after the outlook’s release and, in this example, is the same for either possible forecast. Option prices will reflect the decline from Stdev_pre to Stdev_post.
