Equity Futures Option

ORE introduces the product as follows:

The EquityFutureOptionData node is the trade data container for the EquityFutureOption trade type. Equity options with exercise styles European and American are supported.

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

An equity futures option is an option whose payout depends on a future price, not on a spot price. The future price already carries the financing and dividend expectations of the share. The option then bets on where that future price lands.

The EquityFutureOptionData node is the trade data container for the EquityFutureOption trade type. It has one and only one OptionData trade component sub-node plus elements specific to the equity future option. LongShort names the side and OptionType the call or put right. Settlement takes Cash or Physical. Exactly one ExerciseDate must be given. Premiums carries the option premium. The underlying equity 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. FutureExpiryDate is optional. When IsFuturePrice is true and the underlying is a future contract settlement price, this element names the expiry of that future. Without it the future is assumed to expire with the option.

The payoff follows the option form on the future price: the call pays max(F - K, 0) per unit and the put pays max(K - F, 0). The future price moves with the spot, the rates and the dividends of the underlying equity. The value of the option therefore inherits those drivers through the forward curve.

• The price of the underlying future or forward.
• The spot price of the equity, through the future price.
• The implied volatility of the future price.
• The expected dividends and the rates that set the future basis.
• The strike, the expiry and the style of the option.

The future price rises and falls with the underlying equity. An option on the future moves in the same direction.

The option decays toward its intrinsic value as expiry approaches. The underlying future also ages and converges to the spot at its own expiry. If the future expires before the option, the option's underlying becomes the settled spot value. American options keep the early exercise right until their last exercise date.

A customer who trades equity futures wants options on the same instrument. The option hedges a future position or expresses a view on its direction. Pricing against the future removes the need to model the spot-to-future basis inside the option. In ORE Studio a customer books equity futures options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows an American call whose underlying is the S&P 500 index, with a future expiry before the option expiry:

<EquityFutureOptionData>
    <OptionData>
         <LongShort>Long</LongShort>
         <OptionType>Call</OptionType>
         <Style>American</Style>
         <Settlement>Cash</Settlement>
         <PayOffAtExpiry>true</PayOffAtExpiry>
         <ExerciseDates>
             <ExerciseDate>2022-03-01</ExerciseDate>
         </ExerciseDates>
         ...
    </OptionData>
    <Name>RIC:.SPX</Name>
    <Currency>USD</Currency>
    <StrikeData>
        <StrikePrice>
            <Value>2147.56</Value>
            <Currency>USD</Currency>
        </StrikePrice>
    </StrikeData>
    <Quantity>17000</Quantity>
    <FutureExpiryDate>2021-01-29</FutureExpiryDate>
</EquityFutureOptionData>

Source: ORE User Guide, Products catalogue, equityfuturesoption.tex, listing Equity Future Option data.

The spot-based relative of this product is the Equity Option.