Frequently Asked Questions: Coal Futures-Style Options

  • 26 Jun 2017
  • By CME Group
  • Topics: Energy

Which Coal option contracts are available with futures-style?

Both API2 CIF ARA and API4 FOB Richards Bay options on calendar and quarterly futures strips are available

Are these futures-style options physically settled?

The above futures-style options are physically-deliverable swaption/European-style options. When exercised, the option transforms into a position in its underlying futures, e.g. for a calendar strip the options deliver a strip of 12 monthly futures covering the underlying year and for a quarterly strip the options deliver a strip of three monthly futures covering the underlying quarter.

Do equity-style and futures-style options offset against each other?

The futures and options go through the scenario of SPAN together, therefore any offsets available to one style will also be available to the other. However, the two options will be priced differently and, as such, there will not be a perfect offset between the two.

The methodologies used for each mean that in any scenario where an investor is long the futures and short the option (or vice versa), there will be collateral that will be required to be posted to maintain that position.

Does the futures-style option replace the existing equity-style option?

No, both types of option margin methodologies will be available for trading. Whilst the margin efficiencies of the futures-style options for options traders should be noted, equity-style options are still available.

Will I be exercised if I am “at-the-money?”

All options that are “in-the-money” will be automatically exercised at expiration. “At-the-money” options are considered “out-of-the-money” for exercise and assignment purposes and can only be exercised via contrary instructions.

What options model is used?

Black-Scholes - The basic equation for European options on physicals with no dividends (and hence with cost of carry equal to the risk-free interest rate).

What is the difference between equity-style and future-style options?

Futures-style margin options behave in a manner somewhat analogous to that of a futures contract. The trade of the option itself does not result in any cash flow as the premium does not immediately move. Instead, every open position is marked to market and the resulting settlement variation (or variation margin) amounts are netted together with other such amounts in determining the net pay/collect amount. The total premium of a futures-style option is calculated and paid only on the day the option position is removed, whether by exercise, assignment, or expiration without exercise or assignment. When exercise or expiration of the option contract occurs, the buyer makes a premium settlement payment.

Unlike equity-style margin options, futures-style options have daily realized variation margins calculated. So, margins are paid daily according to the changing value of the option. Also, due to the fact that interest rates do not factor into futures-style margin options, their price differs from equity-style margin options. This is most apparent in long-dated options where interest rates have more time to change option values.

So, do I pay a premium in futures-style options?

In equity-style margining, also known as “traditional” or “premium-paid-upfront” margining, the premium is paid in full at the time of the option purchase. Because the premium is immediately paid, the current market value of the option becomes a credit (if net long) or debit (if net short) to the margin requirement. The premium is calculated at the original trade price and is recognized on the day the trade clears. Thereafter, as long as the trade remains open, the current market value of the option is taken into account in determining the total initial margin requirement.

See further details on the different margining style.

What are the timings on the final exercise day?

The timings can be found in the tables below. N.B. the futures-style margined options have a different exercise to some of the equity-style options.

Futures Style Margined Options Exercise Process

Option Ceases Trading 12:30 p.m. London Time Trading terminates 30 calendar days prior to the first calendar day of the first month in the strip. If such day is not a UK business day, trading terminates on the first preceding UK business day.

7:30 a.m.

New York time

All positions deemed final and options auto exercised Around 1:00 p.m. London Time All options that are “In-the-money” are auto-exercised by the Exchange with reference to intraday prices published by the London Energy Brokers’ Association (‘LEBA’) on the expiration day.

8:00 a.m.

New York time

Contra Instructions 2:30 p.m. London Time All contra-instructions can be submitted to your Clearer up to 2:30 p.m.

9:30 a.m.

New York time

All positions deemed final, CME Positions and Expiration Report available 2:30 p.m. London Time You can find a list of contrary instructions here: http://www.cmegroup.com/clearing/contrary-option-exercise-instructions.html

9:30 a.m.

New York time

Equity Style Margined Options Exercise Process

Option Ceases Trading 5:00 p.m. London Time Trading terminates 30 calendar days prior to the first calendar day of the first month in the strip. If such day is not a UK business day, trading terminates on the first preceding UK business day.

12:00 p.m.

New York time

All positions auto exercised Around 5:30 p.m. London Time All options that are “In-the-money” are auto-exercised by the Exchange with reference to end-of-day prices published by the London Energy Brokers’ Association (‘LEBA’) on the expiration day.

12:30 p.m.

New York time

Contra Instructions 6:00 p.m. London Time (or 15 minutes after LEBA data is published) All contra-instructions can be submitted to your Clearer up to 6:00 p.m.

1:00 p.m.

New York time

All positions deemed final, CME Positions and Expiration Report Available 6:00 p.m. London Time (or 15 minutes after LEBA data is published) You can find a list of contrary instructions here; http://www.cmegroup.com/clearing/contrary-option-exercise-instructions.html

1:00 p.m.

New York time

Please note that the exercise process for equity style margined options will be changed starting with the Jan-19 Calendar options and April-18 Quarterly options.

The new exercise process will align exactly with the future style margined options exercise process (as in the table above).

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