The worst of option (wo) is composed of a bundle of call (put) options all with the same expiration dates but each for a different asset. There must be at least two assets defined. On the expiry date, only the option of the worst performing asset will be exercised, and only then if it is in-the-money (ITM).
How is the worst performing asset determined?
The worst performing asset is the one where the percentage move of the spot over the option's lifecycle (from trade date to expiry date) is the least.
For example, you buy a worst of call for asset A and asset B, with a strike of 2%, and a notional of $100,000.
|
Asset |
Opening spot |
Closing spot |
% movement over option’s lifetime |
|
Asset A |
100 |
105 |
5% |
|
Asset B |
60 |
66 |
10% |
In this example, Asset A is the worst performing asset.
Once you have determined the worst performing asset, the option is then only exercised if this asset is ITM. This is determined by comparing the asset's yield (or percentage ITM) to the strike (which is also defined as a percentage, it must be a positive number and it can be more than 100%) as follows:
For a Worst of call: % move of the worst performing asset > strike (i.e., if the worst performing asset increases by more than the strike)
For a Worst of put: % move of the worst performing asset < strike
How is the payout calculated?
If the option is ITM, the payout is calculated on the expiry by comparing the yield of the worst performing asset to the predefined strike using the following formula:
For a call: (% move - strike) x notional
For a put: (strike - % move) x notional
To continue with the example detailed above, the worst performing asset moved (or increased) by 5% and the strike was 2%. So this asset is effectively 3% in the money. The payout will therefore be 3% of $100,000, i.e., $3,000.
Pricing a worst of option in SDX Commodities & Energy
Currently a worst of option (wo) can only be priced in the Single Option page.
When pricing a worst of option:
You can enter into an option which contains two underlying assets. In the future, you will be able to enter up to four underlying assets.
The spot can only be the current spot. In the future you will be able to set a fixing date for the spot, which can any date from the trade date until the expiry date.
You must choose assets which are all traded in the same currency (USD); the payout currency is automatically set to be the same. In the future, this option will be supported as a quanto option. This means that you will be able to select assets which are not all traded in the same currency, and to change the payout currency as required.