I'm trying to learn more about calendar spread options. If I'm buying a cso do i get an outright position if that's my only trade or is it just a play on vol and theta? Any explanation is appreciated.

According to the product spec for Nymex calendar spread options, (http://www.cmegroup.com/trading/energy/ ... odType=03M) the contracts exercise into the underlying futures contracts.If that's what you were asking... QuoteOriginally posted by: bustabrownI'm trying to learn more about calendar spread options. If I'm buying a cso do i get an outright position if that's my only trade or is it just a play on vol and theta? Any explanation is appreciated.

Ok so since they exercise into the underlying doesn't that imply you have a long and short futures position resulting in no outright position?

QuoteOriginally posted by: bustabrownOk so since they exercise into the underlying doesn't that imply you have a long and short futures position resulting in no outright position?what do you mean by "outright" ? do you mean a position in the spot market ?

QuoteOriginally posted by: bustabrownOk so since they exercise into the underlying doesn't that imply you have a long and short futures position resulting in no outright position?you have a spread position e.g. long Feb WTI futures, short Mar WTI futures

What I am really after is finding a way to price these. The usual option models fail. Does anyone have any recommendations?

QuoteOriginally posted by: bustabrownWhat I am really after is finding a way to price these. The usual option models fail. Does anyone have any recommendations?do they ? Why ?

correlations and vol.any good articles?

You will need a statistical model of the term structure for oil futures maybe Cortazar and Schwartz (2003)see also Laurenti et al: Pricing Crude Oil Calendar Spread Options (2012)

Other well known models for the oil term structure are the "Gibson & Schwartz 1990" model and the "Gabillon 1991" model. Full references are in http://commoditymodels.com/recommended-papers/

QuoteOriginally posted by: willsmithOther well known models for the oil term structure are the "Gibson & Schwartz 1990" model and the "Gabillon 1991" model. Full references are in http://commoditymodels.com/recommended-papers/There is a recent article on the wilmott maganzine. I Think its called "putting the smile back to the futures". This extends the original gabillon (wich isnt able to produce a smile) such that it can incorporate the smile.

QuoteOriginally posted by: berndLQuoteOriginally posted by: willsmithOther well known models for the oil term structure are the "Gibson & Schwartz 1990" model and the "Gabillon 1991" model. Full references are in http://commoditymodels.com/recommended-papers/There is a recent article on the wilmott maganzine. I Think its called "putting the smile back to the futures". This extends the original gabillon (wich isnt able to produce a smile) such that it can incorporate the smile.Hi berndL. Unfortunately, I have been unable to retrieve "putting the smile back to the futures".

QuoteOriginally posted by: edouardQuoteOriginally posted by: berndLQuoteOriginally posted by: willsmithOther well known models for the oil term structure are the "Gibson & Schwartz 1990" model and the "Gabillon 1991" model. Full references are in http://commoditymodels.com/recommended-papers/There is a recent article on the wilmott maganzine. I Think its called "putting the smile back to the futures". This extends the original gabillon (wich isnt able to produce a smile) such that it can incorporate the smile.Hi berndL. Unfortunately, I have been unable to retrieve "putting the smile back to the futures". Yes you're right unfortunatly. It is the wilmott magazine. But it seems it hasnt been put on the puplic internet. Sorry for suggesting it was openly available.

They exercise into a long and short futures position, but expire (I believe) the day before the front-month futures contract expires. So the Oct/Dec CSO expires the day before the Oct contract, so you can still exercise it into the futures at that point. You have to be careful though as that could make you have to take delivery if you don't unwind a part of that position fairly quickly.

As I continue to learn more about this and talk to various people within my organization, I am faced two different points of view. One group uses a finite differences model with the underlying being the spread curve. The other group uses a spread option like that presented by Kirk and others. The main difference being that w/ finite differences, you dont account for things like correlation and the model is less sensative to vol. Which is better and why?