Black Sea Options

What products are being launched?

CME Group is launching options on Black Sea Wheat Financially Settled (Platts) and Black Sea Corn Financially Settled (Platts) futures for trade date July 16, 2018.

Learn more about Black Sea Wheat and Corn.

How do the option contracts work?

CME Group is launching cash-settled options. These options will expire on the same day as the underlying futures contract. Trading in the futures and options will terminate on the last business day of the contract month, which is also a Platts publication date for the price assessment.

The options are automatically exercised at expiry, and will settle with reference to the final settlement price of the futures contract. At maturity, the value of a call option will be the futures final settlement price minus the strike price (or zero, if greater), and the value of a put option will be the strike price minus the futures final settlement price (or zero, if greater).

No early exercise is permitted, and the exercising option holder will receive a cash amount at maturity should the difference be positive from the option holder’s point of view.

How is the final settlement price (the Floating price) of the futures contract calculated?

The final settlement price of the futures contract is equal to the arithmetic average of all values of the respective Platts assessment published during the contract month.

For the Black Sea Wheat options, the Platts assessment is the “FOB Black Sea wheat (Russia, 12.5%).”

For Black Sea Corn options, the Platts assessment is “FOB Black Sea corn (Ukraine).”

These assessments are published each business day during the month.

Is it possible to exercise the options before expiry?

There is no early expiry, and options held until the end of trading of the futures will be cash-settled if they expire in-the-money. Options are tradable until the futures expiry, but are not exercisable beforehand.

What type of options are these?

These are European-style expiry options. The underlying futures contract is based on the average price of the Platts assessment for the underlying commodity. Premium payment is equity-style, meaning that the option buyer pays the premium up front, when the transaction is executed.

What happens during expiry month?

For any forward (non-spot) expiry months, the option is expected to behave just like any other European-style option.

During expiry month, market participants need to account for the fact that for each day in which a Platts assessment is published, a fraction of the final settlement price is set. With each passing day, the uncertainty about the final settlement price is reduced. All else being equal, this reduces the volatility of the spot month settlement price and reduces the time value of the option.

I am familiar with Average Price Options (APOs)– are these the same?

CME Group offers a range of Average Price Options on Energy commodities (for instance the WTI Average Price Options). Those are similar in the sense that those are non-early exercisable options, and that the trading in the options terminates concurrently with the underlying futures contract. The underlying reference price is either the futures settlement price or an assessment from a price reporting agency.

Note that the Chicago Ethanol (Platts) Average Price Options Contract are structurally identical to the newly listed Black Sea Wheat and Corn options. They expire on the same day as the underlying future and are financially-settled against an average of daily cash market assessments provided by a Price Reporting Agency such as Platts.

How do these options compare to other Ags option products?

Options on Agricultural products are typically American-style expiry options which exercise into futures. Those options have an expiry date that is earlier than the underlying futures contract, as option holders may be assigned positions into a physically-delivered futures contracts that need to be managed ahead of the delivery period.

Generally, European-style options have a lesser or equal price in comparison with American-style options given that the American-style options may be exercised any time before expiry.

How does CME Group settle the options on a daily basis?

Just like for other option contracts, CME Group will provide daily settlement prices for the Black Sea options for those expiries which have open interest. The options settlements will be determined using a combination of indicative at-the-money option premiums provided by OTC brokers active in the market, premiums of executed transactions and the futures settlement prices.

How are the options margined?

Options are margined daily and the current market value of the option is taken into account in determining the total margin requirements. A market participant with a long option only position (i.e. an option’s buyer) will only pay the premium up front, and will not face any further margin calls.

For any other participants, such as option sellers and holders of combined futures and option portfolios, margin requirements will be calculated by  CME Clearing.

Get more information on option margining. 

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