Strike Resettable Option

ORE defines the product as follows:

The Strike Resettable Option is an option on a single underlying.

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

The reset works on a trigger. When the underlying price reaches a certain level on an observation date, the strike of the option resets to a new strike.

ORE names the trade types per asset class as follows:

Strike Resettable Options are defined using one of the trade types FxStrikeResettableOption, EquityStrikeResettableOption, CommodityStrikeResettableOption depending on the underlying asset class and an associated node FxStrikeResettableOptionData, EquityStrikeResettableOptionData, CommodityStrikeResettableOptionData.

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

A strike resettable option is a vanilla option with a ratchet. The strike is not fixed for life. If the market reaches an agreed level on an agreed set of dates, the strike moves to a new agreed level. The expiry payoff uses whichever strike applies. The buyer pays a premium for the reset feature.

Underlying defines the underlying. For FX the order of the currencies defines the observed value: for EUR-USD the domestic currency is USD and the observed value is dollars per euro, while for USD-EUR the domestic currency is EUR. LongShort says whether the payoff is computed for the holder or the seller of the option. OptionType says whether the option is a call or a put. Currency is the payment currency. Strike is the initial strike. ResetStrike is the strike used when the trigger has fired. Quantity scales the payoff. Premium, which defaults to zero, and PremiumDate record the option premium and its payment date.

ORE describes the trigger mechanism as follows:

If Up, the trigger event occurs when the underlying value is above the TriggerPrice on any ObservationDates. If Down, the trigger event occurs when the underlying value is below the TriggerPrice on any ObservationDates.

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

TriggerType takes the values Up or Down. TriggerPrice is the level of the underlying at which the trigger fires. ObservationDates are the dates on which the underlying index level is observed for the reset. ExpiryDate is the date on which the option expires and the payoff is computed. SettlementDate is the date on which the payoff settles; ORE uses it unadjusted, as given.

At expiry the payoff is the option payoff on the final index value. The mechanics follow the option type: a call pays when the final index is above the strike, a put when it is below. The quantity scales the payoff and the long-short direction flips it. When the reset event has fired, the payoff uses the reset strike. Otherwise it uses the initial strike. The final index value is the underlying index value on the expiry date.

• The underlying price. It decides both the trigger and the final payoff.
• The volatility of the underlying. It drives the probability that the trigger fires before expiry.
• The distance between the trigger price and the reset strike.
• The interest rates that discount the premium and the payoff.

The reset makes the option path dependent in a binary way: the value splits into a triggered branch and an untriggered branch, each with its own strike.

The trigger is observed on the observation dates, not continuously. Each observation can fire the reset. After the reset, the payoff at expiry uses the reset strike. Without the reset, the initial strike stands. On the expiry date the payoff is computed; the settlement date follows unadjusted.

The reset lets a customer change the strike of an option after the trade starts. This supports views on the market reaching a level and then reversing. In ORE Studio a customer books strike resettable options to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a put on the S&P 500 with a reset to a higher strike when the index trades above 4000:

<EquityStrikeResettableOptionData>
  <LongShort>Long</LongShort>
  <OptionType>Put</OptionType>
  <Currency>USD</Currency>
  <Strike>3500</Strike>
  <ResetStrike>3650</ResetStrike>
  <Quantity>10000</Quantity>
  <TriggerType>Up</TriggerType>
  <TriggerPrice>4000</TriggerPrice>
  <SettlementDate>2021-06-25</SettlementDate>
  <ExpiryDate>2021-06-21</ExpiryDate>
  <PremiumDate>2021-06-25</PremiumDate>
  <Premium>100</Premium>
  <Underlying>
    <Type>Equity</Type>
    <Name>RIC:.SPX</Name>
  </Underlying>
  <ObservationDates>
    <Dates>
      <Dates>
        <Date>2021-04-26</Date>
        <Date>2021-05-24</Date>
        <Date>2021-06-21</Date>
      </Dates>
    </Dates>
  </ObservationDates>
</EquityStrikeResettableOptionData>

Source: ORE User Guide, Products catalogue, strikeresettableoption.tex, listing Strike Resettable Option data (Equity Underlying).