Commodity Option

ORE defines the product as follows:

A European Commodity Option gives the buyer the right, but not the obligation, to buy a set amount of a commodity, at a predetermined price (the strike), at the end of the contract. For this right the buyer pays a premium to the seller.

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

ORE states that vanilla commodity options are supported. The exercise style may be European or American. Settlement can be cash or physical delivery.

A commodity option is a ticket to a future price. The buyer pays a premium today. If the commodity moves in the buyer's favour, the option is used. If not, it expires and only the premium is lost.

The CommodityOptionData node includes exactly one OptionData node and the commodity-specific elements. The OptionData names the direction, the option type, the exercise style, the settlement, and the exercise dates. The Name selects the commodity, such as NYMEX:CL for crude oil. The StrikeData and Quantity set the deal. The option can reference a future price with its own expiry.

A call gains when the commodity price at expiry exceeds the strike. A put gains when it falls below. The value prices off the commodity forward curve and the volatility surface. An American option adds the value of early exercise. The trade is the classic optionality of the family, in the Commodity Forward's terms.

• The commodity forward curve at the expiry point. It sets the moneyness.
• The commodity volatility surface. It drives the time value.
• The strike and the quantity.
• The discount curve of the settlement currency.
• The exercise style and the settlement mode.

A call gains when the commodity strengthens. A put gains when it weakens. Volatility raises the value of both.

The option loses time value as expiry approaches. The moneyness decides its fate at the end. An American option can be exercised early when that pays. At expiry a European option settles or expires. After settlement the trade stops.

A consumer buys calls to cap purchase prices. A producer buys puts to floor sales prices. Both keep the upside of the market. A dealer quotes options to earn premium. In ORE Studio a customer books commodity options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a short European put on crude oil:

<CommodityOptionData>
  <OptionData>
    <LongShort>Short</LongShort>
    <OptionType>Put</OptionType>
    <Style>European</Style>
    <Settlement>Cash</Settlement>
    <PayOffAtExpiry>false</PayOffAtExpiry>
    <ExerciseDates>
      <ExerciseDate>2029-04-28</ExerciseDate>
    </ExerciseDates>
  </OptionData>
  <Name>NYMEX:CL</Name>
  <Currency>USD</Currency>
  <StrikeData>
    <StrikePrice>
      <Value>100</Value>
      <Currency>USD</Currency>
    </StrikePrice>
  </StrikeData>
  <Quantity>500000</Quantity>
  <IsFuturePrice>true</IsFuturePrice>
  <FutureExpiryDate>2029-04-28</FutureExpiryDate>
</CommodityOptionData>

Source: ORE User Guide, Products catalogue, commodityoption.tex, listing Commodity Option data (closing tags normalised).