Equity Option Position

ORE defines the product as follows:

An equity option position represents a position in a single equity option - using a single Underlying node, or in a weighted basket of underlying equity options - using multiple Underlying nodes.

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

ORE states the dual role as follows:

An Equity Option Position can be used both as a stand alone trade type (TradeType: EquityOptionPosition) or as a trade component (EquityOptionPositionData) used within the TotalReturnSwap (Generic TRS) trade type, to set up for example Equity Option Basket trades.

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

An equity option position is a list of options priced as one trade. Each line names an equity, its option terms and its strike. Weights scale each line. A negative weight turns a long position into a short one. The same block can feed an option basket leg inside a total return swap.

The EquityOptionPositionData node is the trade data container for the EquityOptionPosition trade type. Quantity is the number of options written on one underlying share, or the number of units of the option basket. The node takes one or more Underlying descriptions. Each description holds an equity Underlying block, an OptionData block and a Strike element, in that order. The option block carries LongShort, OptionType, Style, Settlement and ExerciseDates. The style can be European or American. Exactly one exercise date must be given. It represents the European exercise date or the last American exercise date. Negative weights are allowed. A long position with a negative weight results in a short position, and the other way around. For a basket each equity carries a Weight value.

The weighted basket price is Basket-Price = Quantity x sum over i of Weight_i x p_i x FX_i. Here p_i is the price of the ith option in the basket, written on one underlying share. FX_i is the FX spot converting from the ith equity currency to the first equity currency, which is the currency in which the net present value of the basket is expressed.

• The spot price of each underlying equity.
• The implied volatility of each underlying.
• The expected dividends and rates that price each option.
• The weights of the basket lines, including their signs.
• The FX spot rates between the equity currencies and the first equity currency.
• The strikes and exercise dates of the options.

Each option line moves with its own underlying and volatility. The basket value is the weighted sum of those moves.

Each option in the basket decays toward its intrinsic value as its exercise date approaches. A basket with one expiry behaves like a single portfolio of options. After exercise the settled lines drop out. The FX conversion rates refresh with each valuation.

A customer can hold a spread or a basket of equity options in one trade. The weighted lines express relative views, such as a call spread on the same index. Negative weights build hedged structures without separate trades. In ORE Studio a customer books equity option positions to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a basket of two S&P 500 calls with strikes 3300 and 3400, weighted equally:

<Trade id="EquityOptionPositionTrade">
  <TradeType>EquityOptionPosition</TradeType>
  <EquityOptionPositionData>
    <!-- basket price = quantity x sum_i ( weight_i x equityOptionPrice_i x fx_i ) -->
    <Quantity>1000</Quantity>
    <!-- option #1 -->
    <Underlying>
      <Underlying>
        <Type>Equity</Type>
        <Name>.SPX</Name>
        <Weight>0.5</Weight>
        <IdentifierType>RIC</IdentifierType>
      </Underlying>
      <OptionData>
        <LongShort>Long</LongShort>
        <OptionType>Call</OptionType>
        <Style>European</Style>
        <Settlement>Cash</Settlement>
        <ExerciseDates>
          <ExerciseDate>2021-01-29</ExerciseDate>
        </ExerciseDates>
      </OptionData>
      <Strike>3300</Strike>
    </Underlying>
    <Underlying>
      ...
    </Underlying>
  </EquityOptionPositionData>
</Trade>

Source: ORE User Guide, Products catalogue, equityoptionposition.tex, listing Equity Option position data, second basket line elided.

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