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Pricing Futures Options Under a Subjective Empirical Return Distribution

Article Quant Q&A · Author: Spasski
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Summary

The document asks how to value commodity futures options when an investor has a specific view about the future return distribution: a substantial oil price spike is considered possible over a stated horizon, with the move expected to be brief. The goal is to translate that scenario into option values and identify contracts or combinations whose market prices appear inconsistent with the view.

It is a question rather than a proposed valuation method: no distribution-fitting procedure, pricing framework, library recommendation, or evidence is provided. A practical analysis would need to specify probabilities and paths across the full horizon, including outcomes outside the spike scenario, then price payoffs under a consistent market and risk framework. The document does not clarify how the short-lived price move should be represented in the underlying futures path or how volatility, rates, and other market inputs should be treated.

Key ideas

  • The question concerns expressing a directional commodity view through futures options.
  • The stated scenario includes a possible large oil price rise that is expected to be brief.
  • The author seeks option values that reflect a subjective future return distribution and potential mispricing.
  • No pricing method, software library, or empirical result is supplied.
  • A complete valuation would require assumptions beyond the single described spike scenario.

Tags

CommoditiesOptionsFuturesVolatility
Full text
# option pricing using empirical distribution


# option pricing using empirical distribution












I am looking for ways to express a directional bet on a commodity through futures options.

Assume that there's 50% probability that oil will spike up 100% in the span of 30% during the next 9 months and that the spike will not last more than 15 days.

How to plug in this opinionated view of the future distribution of oil returns in an option pricing model to calculate which options or options' combos are mispriced based on this view?

Ideally I am looking for a python library which can let me find the answer.

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