A spread option (spr) is similar to the Crack option. However, unlike a crack option where you exchange the future price of an asset for the future price of one or two other assets, in a spread option you exchange the swap price of an asset for the swap price of another asset.
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Because a spread option includes commodities that are not listed on exchanges, they are priced based on swaps. |
When specifying a spread option, you specify how much of the base commodity will be exchanged for a specified quantity of the second OTC commodity. SDX Commodities & Energy then automatically calculates the swap spread (or crack) per unit of the base commodity. This value is calculated as shown below:
[(Volume of Asset 1 * Swap Rate of Asset 1) - (Volume of Asset 2 * Swap Rate of Asset 2)] / (Volume of Asset 1)
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The commodities selected need not be quantified in the same measurement units, as long as a conversion factor for the selected commodities and units is listed in the Conversion Factors window (accessed by clicking Conversion Factors on the left hand side of the pricing page). For example, commodities priced in barrels and gallons can be specified together. In such instances, SDX Commodities & Energy automatically converts between the two using the conversion factors listed in the Conversion Factors window. |
You also specify the strike. On the expiry date, if the holder of the option exercises it, the strike is the amount to be paid for each defined unit of crack, in addition to the exchange of the asset underlyings. That is, if the strike is 35 USD, on the expiry date in addition to the exchange of the asset underlyings, for each unit defined 35 USD will also be exchanged. The strike can be defined as any number, and can be positive, negative or zero.
Why use a spread option?
Similar to a crack option, a spread option is used by a company which is exposed to the difference (or spread) in the prices of two related commodities, rather than to the price of a single commodity. This generally happens when a company uses one commodity as an input to a process which in turn produces another commodity. In such a situation, if the first commodity is listed and the second commodity is OTC, or if both the commodities are OTC, you would use a spread option.