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FuturesOptions
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Joined: August 11th, 2009, 8:52 am

Options on Futures

August 11th, 2009, 9:47 am

Hi all,what is the impact of the forward curve of futures when pricing options on the future?For instance, i sell a put on a backwardated month, ceteris paribus there is a buffer (free lunch) when the future price moves upwards toward the spot price over the period of time.How is this priced in options prices. Must be via the implied vol, right? Because the price of the underlying (in this case the future) does not have that much impact on the option price. In equity markets that should never be an issue, but in commodity markets one often sees a backwardated forward curve.Does anybody know some kind of research material or a paper regarding this "roll yield in options on futures"?Thank you very much in advance!Bjoern
 
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Martinghoul
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Options on Futures

August 11th, 2009, 11:49 am

This is not priced explicitly, but yes, it will make its way into vols. I think to see the effect of this most people would look at not just straight option breakevens, but also roll-adjusted breakevens, which would take into account the term structure of both the underlying and vols.
 
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pcg
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Options on Futures

August 19th, 2009, 3:00 am

is this not true even for bond futures which tend towards par as time goes by ?
 
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FuturesOptions
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Options on Futures

August 19th, 2009, 7:27 am

So, to get it right: impl vol for a put in a contango market has to be higher than for a call. In a backwardated market it should be vice versa because of this tending to spot over the time period?@pcg I guess regarding the bond futures it should be the same, as the forward curve can also be backwardated. The future itself never tends to par at maturity, the bond tends to go to par.
 
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CommOddity
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Options on Futures

August 19th, 2009, 7:42 am

I think you are pretty misleaden: in commodities we use Black76 for option on futures. The model is on the forward itself, not the spot+yeld...contango or backwardation has no impact.Besides the forward has no drift by definition.
Last edited by CommOddity on August 18th, 2009, 10:00 pm, edited 1 time in total.
 
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FuturesOptions
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Options on Futures

August 19th, 2009, 7:52 am

Thanks a lot CommOddity!