A compound Asian strip collar (cpacolst) is an instrument where you have the right to enter into the predefined underlying instrument (the Asian strip strategy) on a predefined date in the future, which is known as the extension date. That is, it is an option on an option.
It is mainly used to purchase protection in a situation where it is not certain that the protection will be necessary. So you are buying the right to purchase predefined protection at a later date.
Accordingly the instrument contains two premium payments:
The market premium.
This is paid upfront on the trade date and is the premium for entering into the compound instrument itself.
The extension premium.
This is the additional premium that will be paid if you decide to actually exercise the compound instrument and so enter into the underlying option.
Although this premium is set on the trade date it is not paid until the extension date (which can be set to any day before the underlying option starts), and only in the event that on the extension date you choose to exercise the compound instrument and so enter into the underlying instrument.
In general, the combined premiums together will exceed the premium that would have been paid for purchasing only the underlying instrument. The increased cost is a result of the fact that you may in the end choose not to exercise the underlying instrument, in which case you will not pay the extension premium.
Pricing a compound Asian strip collar in SDX Commodities & Energy
When pricing a compound Asian strip collar (cpacolst) note the following:
You manually define the extension premium; the system then calculates the market premium (which is paid on the trade date). The lower the extension premium, the higher the market premium will be, and vice versa.
The extension date must be before the start of the underlying instrument.
You set the direction of the compound instrument using the relevant Buy <> Sell button.
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Setting the direction of the overall direction is not the same as simply flipping the Buy/Sell direction of the underlying instrument. |
In the Single Option page you can define the instrument's market premium and the system will then solve for the extension premium to be paid on the extension date. You do this using the Solver functionality.