Commodity average-price option
Value one OTC call or put on the arithmetic average of commodity prices observed over a defined fixing period.
How it works
The strike is compared with the average of all contractual observations. A favorable day can therefore be offset by an unfavorable day before the option payoff is calculated. The price reference may be an organization's quote or a selected listed Future, using equally weighted open fixing days.
Key contract terms
- Long or short, call or put and total quantity
- Positive strike in the contract's price unit
- Organization quote or listed Future for prices
- Averaging dates and contractual fixing calendar
- Listed Future volatility reference, directly or as a proxy
- Optional initial premium recorded separately
Payoff: the contractual result
For a long call, payoff is quantity × max(average price − strike, 0); a put reverses the price difference. A short position reverses the payoff sign. Before the final fixing, Monte Carlo combines known exact prices with simulated remaining observations and discounting.
A simple example
A long call covers 90 units with strike EUR 200. Final prices of EUR 190, 210 and 230 average EUR 210, giving 90 × 10 = EUR 900. A separate EUR 90 initial premium leaves EUR 810 total P&L. The corresponding short position has EUR −810.
Illustrative amounts exclude fees and currency conversion. A payoff is distinct from the instrument's value before maturity.
Lifecycle
- Contract created
- Successive price observations
- Complete contractual average
- Final result once data is confirmed
- Create one option with its averaging period, fixing calendar, total quantity and strike.
- Successive observed prices build the arithmetic average. Each new observation reduces uncertainty but does not exercise or close a slice of the option.
- The remaining dates stay projected until their contractual observations are available. There are no separately realized daily option payoffs and no generated positions from those observations.
- At the end of the period, the complete required average determines the single payoff for the whole quantity. Finalization requires all exact fixings; it is not triggered by the first fixing or the date alone.
Using this instrument in OTCValue
This is one option on an average, not a sum of daily option payoffs. Missing required fixings prevent finalization. The volatility proxy may reference another commodity and is disclosed; it never replaces the contractual price source. Referenced Futures must cover the averaging period. Realization does not record payment.