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| Heating Oil Average Price Options |
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Average price options, also referred to as Asian options or average rate options,
are settled against the average of prices for an underlying commodity over a period
of time. These instruments have become popular in the over-the-counter markets
during the past decade as a way of dampening market volatility, and are now available
for competitive trading on the NYMEX Division floor – a transparent market
forum that gives market participants the credit protections of the Exchange clearinghouse.
The contract underlying the NYMEX Division heating oil average price options is the New York harbor heating oil calendar swap futures contract.
Average price options are financially settled upon expiration and cannot be exercised
into the underlying futures contract.
The settlement price is based on the difference between the strike price and the average of front month settlements during the calendar month. For call options, the strike price will be subtracted from the average front month price over the course of the calendar month. For put options, the final settlement will be the strike price minus the average front month price over the calendar month.
Average price options are based on calendar months. In this respect, they are
different from the Exchange's traditional options on energy futures which
generally expire one to three days before the termination of trading in the underlying
futures contracts.
Oil companies, refineries, trading firms, and other intermediaries that are engaged
in physical trading of petroleum and refined products are constantly exposed to
market prices which can be highly volatile. The characteristics of average price
options have helped them evolve into a common risk management tool for the oil
markets. They are generally less expensive than American or European options because
the volatility of the options contract is reduced by averaging the prices of the
underlying commodity during the averaging period. |
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