Commodity Swaption

ORE defines the product as follows:

A Commodity Swaption is a European option on a forward starting Commodity Swap consisting of a sequence of calculation periods. The exercise decision is made once before the Swap starts.

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

ORE states the exercise directions as follows:

In a Payer Swaption, the holder of the option has the right to pay the fixed prices and to receive the floating prices. In a Receiver Swaption, the holder of the option has the right to receive the fixed prices and to pay the floating prices.

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

A commodity swaption is an option on a future price agreement. The buyer pays a premium for the right to enter a commodity swap later. If commodity prices move in the right direction, the option is exercised. Otherwise it expires.

The CommoditySwaptionData node carries an OptionData node. The LongShort flag sets the direction from the point of view of the long party. The payer and receiver legs of the underlying swap always use the perspective of the party that is long. Only the European exercise style is supported. The Settlement flag selects cash or physical delivery. Optional NoticePeriod, NoticeCalendar, and NoticeConvention terms move the notice date relative to the exercise date. An ExerciseFees node holds the exercise fees, if any.

The underlying is a forward-starting commodity swap. Its value at the exercise date decides the option. The option prices off the commodity volatility surface and the forward curve at the swap start. After exercise the position ages like the commodity swap it started.

• The commodity volatility surface. It drives the option value.
• The commodity forward curve at the swap start. It sets the moneyness of the option.
• The strike swap rate and the leg conventions.
• The discount curve of the settlement currency.
• The settlement mode, cash or physical.

A payer swaption gains when prices rise above the strike. A receiver gains when they fall. Volatility raises the value of both sides.

The option loses time value as the exercise date approaches. The exercise decision is made once before the underlying swap starts. At exercise the trade becomes the underlying swap and ages with it. Without exercise it expires worthless.

A consumer buys a payer swaption to cap the price of future commodity purchases. A producer buys a receiver swaption to protect its sales price. A dealer sells swaptions to earn premium. In ORE Studio a customer books commodity swaptions to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long European swaption:

<Trade id="...">
  <TradeType>CommoditySwaption</TradeType>
  <Envelope>
    ...
  </Envelope>
  <CommoditySwaptionData>
    <OptionData>
      <LongShort>Long</LongShort>
      <Style>European</Style>
      <Settlement>Cash</Settlement>
      <ExerciseDates>
        <ExerciseDate>2023-01-05</ExerciseDate>
      </ExerciseDates>
    </OptionData>
    <LegData>
      <LegType>CommodityFixed</LegType>
      ...
    </LegData>
    <LegData>
      <LegType>CommodityFloating</LegType>
      ...
    </LegData>
  </CommoditySwaptionData>
</Trade>

Source: ORE User Guide, Products catalogue, commodityswaption.tex, listing Commodity swaption (leg detail abbreviated).

The underlying is a Commodity Swap. The Commodity Average Price Option differs in its exercise timing, at the period end rather than before the underlying starts.