Best Entry Option

ORE defines the product as follows:

The Best Entry Option is an option on a single underlying that has a payoff contingent on the `best entry' of the underlying index into a specified region on a set of specified `strike observation dates', which is determined by a single barrier.

Source: ORE User Guide, Products catalogue, bestentryoption.tex.

ORE introduces the trade types:

Best Entry Options are defined using one of the trade types FxBestEntryOption, EquityBestEntryOption, CommodityBestEntryOption depending on the underlying asset class and an associated node FxBestEntryOptionData, EquityBestEntryOptionData, CommodityBestEntryOptionData.

Source: ORE User Guide, Products catalogue, bestentryoption.tex.

A best entry option is a view on one index with a good entry point. The entry point is the index level that anchors the payoff. It is set on the strike date. If the index dips to the trigger level on a strike observation date, the entry point improves to the best level seen, but only down to the reset minimum. At expiry the index gets a final look. If it stands above the strike, the holder collects the capped rise above the improved entry point. If it stands below the strike, the holder pays the shortfall. The structure rewards the holder when the index ends up, after a dip gave a better entry.

Underlying names the underlying. For an FX underlying the currency order defines the observed value, so that EUR-USD observes USD per EUR and USD-EUR observes EUR per USD. Currency is the payment currency. Notional is the notional amount. LongShort takes Long or Short and fixes whether the payoff is computed for the holder or the seller.

StrikeDate is the date whose index level sets the entry level when no trigger event occurs. It must fall before the option expiry date. StrikeObservationDates is the window that decides the entry level. ORE describes it as follows:

StrikeObservationDates: The set of dates on which the underlying index level is observed - the lowest of which is used to compute the option payoff if the underlying index is greater than the strike on the expiry date.

Source: ORE User Guide, Products catalogue, bestentryoption.tex.

TriggerLevel is the barrier of the product. ORE describes it as follows:

TriggerLevel: The value that is compared to the underlying index on each strike observation date to determine if a Trigger Event has occurred.

Source: ORE User Guide, Products catalogue, bestentryoption.tex.

The trigger level is given as a decimal, a percentage of the index level on the strike date. When the observed index level reaches the trigger level on any observation date, a trigger event occurs and the entry level resets. The improved entry level is the maximum of the reset minimum value and the lowest observed index level. The reset minimum is also a percentage of the strike-date level, and it floors how far the entry can improve. Without a trigger event the entry level is the strike-date level.

Strike is the strike value used to compute the payoff. It is given as a decimal, a percentage of the entry level. Multiplier is the payoff multiplier for the case where the final index level is above the strike; it defaults to one. Cap is the payoff ceiling. ORE describes it as follows:

Cap: The maximum value of the payoff (before the notional and multiplier are applied).

Source: ORE User Guide, Products catalogue, bestentryoption.tex.

The cap is given as a decimal percentage. ExpiryDate is the date when the option expires and the payoff is computed. SettlementDate is the date when the payoff is settled, used unadjusted as given and on or after the expiry date. Premium is the option premium, zero by default. PremiumDate is the date when the premium is paid.

The payoff compares the final index level with a strike level. The strike level is the strike value K times the entry level, where the entry level is set per the trigger path above. The strike value is a decimal, for example 0.85 for a strike at 85 percent of the entry level.

When the final level stands at or above the strike level, the payoff is the notional times the multiplier times the capped positive return of the index from the entry level. The positive return is floored at zero: a final level between the strike level and the entry level pays nothing. The cap bounds the participation, for example at 6 percent.

When the final level stands below the strike level, the payoff is negative. The holder pays the notional times the shortfall of the final level below the strike level, relative to the entry level.

• The final index level at expiry. It selects the payoff branch and sets its size.
• The entry level, and with it the strike-date level and the observation path of the index.
• The volatility of the underlying. It drives the chance of a trigger event and the dispersion of the final level.
• The trigger level and the reset minimum.
• The strike value, the cap and the multiplier.
• The notional.
• The interest rates that discount the premium and the payoff.

The strike observation dates form the trigger window. Each one checks the index against the trigger level. A trigger event resets the entry level toward the best observed level, floored by the reset minimum. The entry level then stays fixed. The expiry date compares the final level with the strike and computes the payoff, positive or negative. The payoff settles on the settlement date, and the premium was paid on the premium date.

A best entry option sells participation in an index from an entry point that improves with the market path. The buyer keeps the upside of a rise from a good level, capped, and carries the downside of a finish below the strike. Banks offer it to clients who expect a market to dip and recover, because the dip improves the entry level. In ORE Studio a customer books best entry options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long best entry option on the S&P 500 with a notional of 1000000 USD. The strike value is 0.85, the cap 0.06 and the multiplier 1. The trigger level of 0.95 sits just below the strike-date level, and the reset minimum of 0.85 floors the entry improvement:

<EquityBestEntryOptionData>
  <LongShort>Long</LongShort>
  <Strike>0.85</Strike>
  <Cap>0.06</Cap>
  <ResetMinimum>0.85</ResetMinimum>
  <Notional>1000000</Notional>
  <Multiplier>1</Multiplier>
  <TriggerLevel>0.95</TriggerLevel>
  <SettlementDate>2021-11-20</SettlementDate>
  <PremiumDate>2021-11-22</PremiumDate>
  <StrikeDate>2020-12-15</StrikeDate>
  <Underlying>
    <Type>Equity</Type>
    <Name>RIC:.SPX</Name>
  </Underlying>
  <StrikeObservationDates>
    <Dates>
      <Dates>
        <Date>2021-03-01</Date>
        <Date>2021-06-01</Date>
        <Date>2021-09-01</Date>
      </Dates>
    </Dates>
  </StrikeObservationDates>
  <Currency>USD</Currency>
  <Premium>100</Premium>
  <ExpiryDate>2021-11-20</ExpiryDate>
</EquityBestEntryOptionData>

Source: ORE User Guide, Products catalogue, bestentryoption.tex, listing Best Entry Option data (Equity Underlying). The premium of 100 USD is paid on 2021-11-22, two days after the strike date, and the expiry and settlement both fall on 2021-11-20.