Index CDS Option Premiums and Defaulted-Series Notional

Summary

This document asks how to interpret a quoted premium for an option on an index CDS series after constituent defaults have reduced the index factor. The example concerns a payer option with a stated notional, strike, expiry, and bid–ask quote, and asks whether the premium is multiplied by the current factor. It also outlines the writer’s understanding of exercise: a strike-related amount scaled by the factor, front-end protection for defaults during the option’s life, and entry into an index position at expiry.

The text does not provide an answer or supporting market convention, so it cannot establish which premium calculation is correct. The mechanics listed are the questioner’s assumptions and should not be treated as verified terms. Resolving the issue requires the applicable index-option quotation and settlement conventions, including how notional, factor, accrued premium, and default protection are handled.

Key ideas

• The question concerns whether an index CDS option premium quote is scaled by the current index factor.
• The example distinguishes stated option notional from a factor-adjusted amount related to the strike.
• The document describes front-end protection for constituent defaults before expiry as the questioner understands it.
• It does not answer the quotation-convention question or verify the described exercise mechanics.

Tags

# Index CDS Option Quotation Convention


# Index CDS Option Quotation Convention












I have a question about the quotation convention for index CDS options on the on-the-run version of a Series after defaults.

For example, for CDX NA HY Series 45, the on-the-run version is currently version 2 with an index factor of 0.99. Assume I see a Payer option quote bid - ask of 280 bps - 300 bps for the strike 104.5 and expiry 16 Dec 2026. If I buy \$10,000 of the Payer option today 17 Apr, what premium will I pay on 22 Apr? Is it \$300 or \$300 x 0.99?

For the avoidance of doubt, my understanding of the \$10,000 notional Payer option above on version 2 is that if at expiry I exercise the option:

- I receive 4.5% x 0.99 x \$10,000 (strike related amount, strike is 104.5)

- I receive front end protection on each entity that defaults between 17 Apr 2026 (trade date) and 16 Dec 2026 (expiry). In particular, for any entity that defaults in this period, I get $(1-R) \, \omega \, \\\$10,000$ where $\omega$ is the entity weight in the index and $R$ is the entity recovery at auction.

- I enter into a payer index position on \$10,000 notional of index as of 16 Dec 2026 and the index will have its prevailing index factor (less than or equal to the current factor of 0.99) and its prevailing price at that date.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.