Commodity Option Strip

ORE groups both forms under one node. The node can represent a strip of commodity average price options, or a strip of European commodity options, one per calculation period. The trade type CommodityOptionStrip selects the form.

A commodity option strip is a strip of tickets, one for each period of a swap. Each ticket is an option on that period's commodity price. The buyer can hedge a stream of purchases, period by period, with a strip of options instead of one contract.

The CommodityOptionStripData node starts with a LegData node of type CommodityFloating. It names the commodity and the calculation periods. The IsAveraged flag in its CommodityFloatingLegData chooses the option type. With IsAveraged false, a strip of European commodity options is created, one put or call per calculation period. The exercise date is the pricing date of the period. With IsAveraged true, a strip of commodity average price options is created. The exercise date is the period end date.

Each calculation period may contain a put and a call, bought or sold. The Calls and Puts nodes set the type, the direction, and the strike. Inside Calls sit LongShorts, Strikes, and an optional BarrierData. Puts mirrors it. LongShorts and Strikes hold one entry, shared by all periods, or one entry per period. If Calls is omitted, the strip has no calls. At least one of Calls or Puts is needed for a valid strip. Calls and puts can carry different barrier terms. All calls share the same terms, and all puts share theirs.

The Style node sets the exercise style, European or American. European is the default. A strip of APOs assumes European and issues a warning otherwise. Settlement sets cash or physical delivery, with cash the default. A strip of APOs assumes cash and issues a warning otherwise. Premiums adds premium amounts, received or paid. IsDigital true turns the strip into commodity digitals. PayoffPerUnit then sets the payoff per commodity unit.

The strip value is the sum of its period option values. Each non-averaging option prices on one fixing. Each averaging option prices on the period average. Period structure, strikes, and barriers enter the value independently, period by period.

• The commodity forward curve at each period's fixing dates.
• The volatility surface at each period.
• The strikes, premiums, and barriers of the individual options.
• The settlement mode and the digital payoff, when selected.
• The discount curve of the settlement currency.

Each option follows its own direction. A strip of calls gains when commodity prices rise across the periods. A strip of puts gains when they fall.

Each period's option settles as its calculation period completes. The settled options drop out of the strip. The remaining periods keep their exposure. Near the end only the last period option is left. At the last period end the strip completes.

A customer with a rolling commodity exposure can hedge each period with its own option. Averaging periods suit buyers of physical commodity priced off averages. Non-averaging periods suit single-point fixings. The strip books the whole stream in one trade. In ORE Studio a customer books commodity option strips to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a strip with a short call and a long put:

<Trade id="...">
  <TradeType>CommodityOptionStrip</TradeType>
  <Envelope>
    ...
  </Envelope>
  <CommodityOptionStripData>
    <LegData>
      <LegType>CommodityFloating</LegType>
      ...
    </LegData>
    <Calls>
      <LongShorts>
        <LongShort>Short</LongShort>
      </LongShorts>
      <Strikes>
        <Strike>5.3</Strike>
      </Strikes>
      <BarrierData>
        <Type>UpAndIn</Type>
        <Style>American</Style>
        <LevelData>
          <Level>
            <Value>70.0</Value>
          </Level>
        </LevelData>
      </BarrierData>
    </Calls>
    <Puts>
      <LongShorts>
        <LongShort>Long</LongShort>
      </LongShorts>
      <Strikes>
        <Strike>8.17</Strike>
      </Strikes>
    </Puts>
    <Premiums> ... </Premiums>
    <Style>European</Style>
    <Settlement>Cash</Settlement>
  </CommodityOptionStripData>
</Trade>

Source: ORE User Guide, Products catalogue, commodityoptionstrip.tex, listing Commodity Option Strip (optional elements omitted).