Equity Double Barrier Option

ORE defines the product as follows:

An Equity Double Barrier Option is a path-dependent option whose existence depends upon an Equity spot rate reaching one of the two pre-set barrier levels. Exercise is European, and barriers are American (continuously monitored).

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

ORE describes the barrier behaviour as follows:

A knock-in option is a barrier option that only comes into existence/becomes active when the Equity spot rate reaches the one of the barrier level at any point in the option's life. Once a barrier is knocked-in, the option will not cease to exist until the option expires and effectively it becomes a Vanilla Equity Option.

A knock-out option starts its life active, but ceases to exist/becomes inactive, if the one of the barriers is reached during the life of the option.

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

A double barrier option is a vanilla option inside a corridor. Two tripwires sit above and below the current price. If the price touches either one, the option either dies or comes alive. The corridor makes the option cheaper or more exotic than the single-barrier form.

The EquityDoubleBarrierOptionData node is the trade data container for the EquityDoubleBarrierOption trade type. It has one OptionData sub-node and one BarrierData sub-node. The relevant OptionData fields are LongShort, OptionType, Style and Settlement. The style allows European exercise only. Settlement can be Cash or Physical. Exactly one ExerciseDate must be given. BarrierData holds the two levels in Levels in ascending order. Type takes KnockOut or KnockIn. The barrier levels are quoted in the currency of the underlying equity spot. The underlying comes from Name or an Underlying node. Currency is the currency of the option. StrikeData holds the strike and supports StrikePrice only. Quantity is the number of units. StartDate, Calendar and EQIndex support a check for a barrier breach before today's date. The equity index format is EQ-RIC:Code.

A knock-in option becomes a vanilla equity option when either barrier is reached. A knock-out option ends when either barrier is reached. An expired knock-out option that never touched a barrier pays its vanilla payoff. An expired knock-in option that never touched a barrier pays nothing. The value of the product is the vanilla option value adjusted for the probability of touching either barrier.

• The spot price of the underlying equity and its distance to each barrier.
• The implied volatility of the underlying. It drives the chance of a breach.
• The width of the corridor between the two levels.
• The strike and the exercise date.
• The interest rates and dividends of the underlying.

Close to a barrier the option is most sensitive to the spot and to volatility. The corridor width sets how long the option can survive.

Both barriers are monitored continuously. A knock-out option that touches a barrier ends at once. A knock-in option that touches a barrier becomes a vanilla equity option for the rest of its life. An out option that survives ages like a vanilla option, with its survival probability falling as time passes without a touch.

A double barrier structure prices the range view of a customer. A knock-out call inside a corridor is cheaper than its vanilla equivalent. The corridor can also express the expectation that the index stays between two levels. In ORE Studio a customer books equity double barrier options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a knock-out call on the S&P 500 index inside a corridor from 3000 to 3500:

<EquityDoubleBarrierOptionData>
    <OptionData>
        <LongShort>Long</LongShort>
        <OptionType>Call</OptionType>
        <Style>European</Style>
        <Settlement>Cash</Settlement>
        <ExerciseDates>
            <ExerciseDate>2021-01-29</ExerciseDate>
        </ExerciseDates>
    </OptionData>
    <BarrierData>
        <Type>KnockOut</Type>
        <Levels>
            <Level>3000.00</Level>
            <Level>3500.00</Level>
        </Levels>
    </BarrierData>
    <Name>RIC:.SPX</Name>
    <Currency>USD</Currency>
    <StrikeData>
      <StrikePrice>
        <Value>3200.00</Value>
        <Currency>USD</Currency>
      </StrikePrice>
    </StrikeData>
    <Quantity>1000</Quantity>
    <StartDate>2019-12-27</StartDate>
    <Calendar>US-NYSE</Calendar>
    <EQIndex>EQ-RIC:.SPX</EQIndex>
</EquityDoubleBarrierOptionData>

Source: ORE User Guide, Products catalogue, eq_doublebarrieroption.tex, listing Equity Double Barrier Option data.